Our response aims to clarify questions around the reverse charge, particularly around repairs and maintenance complexities.
6 July 2018
Further to our previous articles, HMRC has published draft legislation regarding the forthcoming domestic reverse charge for VAT on construction services, which should come into effect from 1 October 2019.
The domestic reverse charge will address fraud in construction sector labour supply chains by ensuring that the customer – rather than the supplier – is responsible for accounting for VAT.
Based on the draft legislation, most housing associations and their group entities are unlikely to be required to apply the domestic reverse charge to their purchases, subject to the more detailed comments below.
About the draft legislation
The draft statutory instrument, which is subject to a six-week technical consultation, has been published alongside a draft explanatory memorandum, and a draft tax information and impact note. The documents can be found here.
The draft provisions confirm that, where a person receives construction services ‘for any purpose other than making further supplies of’ construction services, the supply should be excluded from the reverse charge.
The draft legislation also specifically excludes from the scope of the domestic reverse charge:
- supplies of construction services that are received by tenants/landlords who are making an onward supply of those construction services to tenants/landlords
- supplies of construction services that are received by an entity whose only further supply is to a connected party.
What this means for housing associations
HMRC’s intention has been to exclude the ‘end user’ of construction services from the domestic reverse charge scope.
This has been achieved in the draft statutory instrument by only applying the reverse charge in instances where construction services are used to make a further onward supply of those services.
As identified and discussed in our previous articles, this could potentially lead to a situation whereby in-house repairs and maintenance, or a development company within a housing association’s corporate group (and potentially in the housing association’s VAT group too), could be impacted by the domestic reverse charge rules.
That being said, the draft statutory instrument confirms that:
- Repairs and maintenance services (including specifically, for example, painting) are included within the scope of the reverse charge. Therefore, activities of a repair and maintenance company could in principle fall within the provisions.
- There is an exclusion from the reverse charge mechanism for supplies of construction services to an entity that is only making onward supplies of construction services to another entity within its own corporate group. This may be particularly relevant to repairs and maintenance companies within a housing association’s group – if such entities are buying in services only to supply to connected parties (e.g. the parent housing association). In cases such as this, the domestic reverse charge should not apply to their purchases, and suppliers should charge VAT in the normal way.
However, if repairs and maintenance companies are providing their services to third parties as well as group companies, then the domestic reverse charge may apply to the services received unless any other exceptions can be applied.
Contribute to the consultation
The consultation ends on Friday 20 July and the Federation will submit a response, particularly around the repairs and maintenance complexities.
If you would like to provide comments, please let Will Jeffwitz (email@example.com) know by Wednesday 18 July.