VAT on supplying construction services into the UK from abroad
International reverse charge or domestic reverse charge?
The introduction of the domestic reverse charge for the construction industry on 1 March 2021 does not only affect UK businesses but also businesses established abroad. Businesses should already have been familiar with the international reverse charge, but questions have since arisen as to how the domestic reverse charge interacts with the international reverse charge, whether one reverse charge might override the other and, if so, which one.
The international reverse charge is a simplification measure that allows overseas suppliers to avoid having to register for VAT in the UK. Instead, they can simply issue an invoice without any VAT to their UK based VAT registered customer. The UK based customer is then required to calculate and self-account for the UK VAT due on the construction services.
The domestic reverse charge is an instrument to combat VAT fraud and removes the requirement and ability to charge VAT throughout the whole supply chain until the very last leg.
However, difficulty arises because the application of both reverse charges hinges on whether the customer and/or the supplier are already registered for VAT. If these VAT registration requirements are not met, the normal VAT rules apply. These normal rules usually require some businesses in the supply chain to register for UK VAT. If these businesses are then registered for VAT under the normal VAT rules, they potentially meet the requirements for the application of the reverse charge rules which override the normal VAT rules.
As a result, overseas construction businesses can be required to register for UK VAT only to find that they are not supposed to charge any VAT to their customers. The longer the supply chain is, the more complex the situation becomes, and care should be taken when considering whether a UK VAT registration is required, especially where supply chains involve multiple UK and foreign subcontractors.
Whilst this article only covers the VAT reverse charges, there are wider issues arising for overseas businesses in the construction industry. These include the import of goods into the UK, the input tax recovery on costs, general requirements such as invoicing and VAT reporting under both reverse charge procedures, and the application of the construction industry scheme (CIS).
If you would like to discuss any of the above, please contact your usual Blick Rothenberg contact or speak to Antje Forbrich using the form below.