We use cookies to make your experience of our website better. Some of these are set by third party Google Analytics to help us analyse website traffic. To comply with privacy regulations, we require your consent to set these cookies. If you continue to use the site without selecting an option we will assume you are happy for us to use cookies.

‘Don’t reverse yourself into a corner’ – Construction contracts and the VAT reverse charge scheme

‘Don’t reverse yourself into a corner’ – Construction contracts and the VAT reverse charge scheme

The Construction Services Domestic Reverse Charge (“CSDRC”) rules for VAT on construction services will come into force on 1 October 2019. These rules will have significant implications for the construction sector.

The CSDRC rules mean that a VAT-registered main contractor who engages a VAT-registered sub-contractor will have to account for the VAT in respect of those sub-contract works and services itself, through its own VAT return rather than paying VAT to its sub-contractor. The sub-contractor will identify on its invoices to the main contractor that VAT is subject to this domestic reverse charge scheme. The main contractor will then recover this reverse charge VAT, along with its own VAT as input tax in the normal way.

The CSDRC rules apply to ‘construction services’ and the definition of what constitutes construction services mirrors that in the Construction Industry Scheme (“CIS”). In addition, the same CIS exclusions apply, which include professional services supplied by the design and professional teams on a project.

Inevitably, sub-contract terms and conditions will have to adapt to meet the requirements of the CSDRC, the three main issues being:

  • a change to the invoicing process to record the application of the reverse charge scheme;
  • as the onus under the CSDRC rules will be on the main contractor to verify the correct VAT rate (rates can vary dependant on the work at 20%, 5% or 0%), how does the sub-contract deal with the reporting duties of the sub-contractor and recovery of any HMRC penalties if that sub-contactor reporting is wrong; and
  • the CSDRC rules will cause a cashflow hit for the sub-contractor, as they are no longer able to utilise the VAT paid as working capital before they have to account to HMRC for it. This might mean that the overall covenant of the sub-contractor needs to be reassessed, or the payment profile in the sub-contract altered to smooth the effect of this cashflow hit.

While it is expected that HMRC will allow a certain ‘bedding in’ period post 1 October 2019, contractors should consider these issues now and be ready to implement changes to their accounting systems and standard terms and conditions by the commencement date.

Don’t reverse yourself into a corner by trying to tackle the CDRC rules when it’s already too late.

By James Forbes
Partner, Construction

Click here to set up your preferences so we can send you the insight you need to stay precisely informed

Burness admin