It was with great enthusiasm that I read the HMRC Brief announcing a second delay to the introduction of the domestic reverse charge (DRC). The DRC is an anti-avoidance provision, intended to stop a sub-contractor charging VAT, the customer recovering that VAT, and the sub-contractor going missing with the VAT (rather than paying it over to HMRC). This is a laudable aim.
However, in my view, the DRC introduces uncertainty and complexity into the VAT supply chain. At each stage the supplier needs (among other things) to assess whether his customer is an end-user (e.g. an occupier of the building or a developer), to whom the supplier should be charging VAT in the ordinary way, or whether his customer is also a building contractor in which case it will have to charge itself VAT in respect of the building services it buys in.
The above and other complexities in the DRC regime are hard enough to grapple with at the outset of a transaction. However, what happens if part way through the build the developer (D) changes its intention and sells the part-completed building to an investor (I) and now completes the building as I's contractor? I is an end-user, so D charges VAT in the ordinary way. However, D is no longer an end user and his sub-contractor (C) now no longer charges D VAT. Instead, D accounts for VAT on the supplies to him by way of the DRC, but will the people in the accounts team of C and D know this? If not, will they continue issuing and paying "VAT" invoices, giving rise to a risk for D that it is paying an amount that purports to be VAT, but is no longer properly chargeable and so not recoverable as input VAT?
Given these and other potential complexities, my hope is that this further postponement means that these rules are not implemented.
the introduction of the domestic reverse charge for construction services will be delayed from 1 October 2020 until 1 March 2021 due to the impact of the coronavirus on the construction sector.