Latest VAT updates for Construction and Real Estate
While our attention is inevitably diverted by the shenanigans of Brexit and the General Election, day to day life carries on, while not perhaps unabated, with a degree nevertheless of inexorability.
It is easy in these tumultuous times to miss changes that occur somewhat in the background.
The purpose of this article is to provide an update on some recent changes that have occurred that have an impact for businesses in the Construction and Real Estate sector.
VAT Groups – who can join?
With effect from 1 November 2019, it is now possible for both individuals and partnerships to become members of a VAT group. The usual rules with respect to establishment in the UK and the common control criteria still apply.
While this change is undoubtedly welcome and will simply the VAT position with respect to transactions between individuals and partnerships and corporate bodies under common control, there can be disadvantages to VAT grouping that you should also bear in mind. For example:
- From a compliance perspective, limits for Payments on Account, correcting errors, cash accounting, and the partial exemption de minimis limit will apply based on the group as a whole, and not just to each member of the group
- All of the group members will be jointly and severally liable for the VAT debts of the group
- If any of the incoming members will make exempt supplies to parties outside of the VAT group, this could result in VAT restriction applying to overhead costs for the group as a whole.
- An option to tax made by one entity will bind other members of the VAT Group even if they leave the VAT group
- If there is a planned disposal of any entity within the VAT group, it is possible that any due diligence work by a prospective buyer will include a review of the wider group, given that any group entity acquired will remain jointly and severally liable for VAT debts that arose in the period in which it was a member of the VAT group.
Energy Saving Materials - updated
With effect from 1 October 2019, changes have been made to the application of VAT to Energy Saving Materials (ESM) installed in residential accommodation in order bring the UK in line with EU law. The existing provisions allowed the reduced rate of VAT of 5% to be applied too broadly under EU law.
Under the revised law, VAT at 5% will apply to supplies of services of installing ESM’s in residential accommodation where:
The supply is to a person aged 60 or over or in receipt of certain benefits, to a housing association, or in respect of a building used for certain residential purposes (such as care homes, children’s homes, hospices, student accommodation, etc.), or
Where the value of the ESM’s does not exceed 60% of the total value of the supply and install service. If the value does exceed 60%, the materials will be subject to VAT at the standard rate, though the installation service will still qualify for the reduced rate
Supply and installation of wind and water turbines no longer qualify for the reduced rate in any circumstances.
Restoration of Lost Space - Works for Disabled Persons
Certain construction services supplied to either a disable person or a charity for the benefit of disabled persons can be zero-rated. The works in broad terms include building ramps and widening existing doorways or hallways to allow easier access, and providing, extending or adapting a bathroom, washroom or lavatory to suit the condition of a disabled person.
Extending, installing or adapting a bathroom, washroom or lavatory can result in space being lost (“lost space”) in the building. It has always been the case that the restoration of lost space (for example extending an adjacent room to its original size where part of the room has been used to extend a bathroom) also qualifies for zero-rating.
However, HMRC’s guidance stopped referring to the relief available for lost space in December 2014, and consequently there has been uncertainty over recent years over HMRC’s view on the scope of the relief. HMRC have now updated their guidance in VAT Notice 701/7 to provide greater detail on their position with respect to this relief.
Remedial work following Grenfell
Following the Grenfell tragedy, residential landlords, housing associations and other property management bodies have been reviewing their properties to assess whether the cladding originally installed meets the necessary safety standards to prevent a further tragedy form occurring.
In the event that the cladding does not meet the required standards, it must be replaced and the cost of doing this can be significant. HMRC have agreed that provided certain criteria are met, the works to replace cladding can qualify for zero-rating, which will be a material reduction in cost for such works, which would, on the face of it, not qualify for such treatment.
HMRC will produce an information sheet in due course to clarify their position, but until such time that this is produced, HMRC expect to be consulted on each individual case.
And finally – the Construction Domestic Reverse Charge
I think we all breathed a collective sigh of relief when HMRC finally announced on the 9th of September, just three weeks before the planned implementation date, that the Construction Domestic Reverse Charge (“DRC”) was to be deferred until 1 October 2020. I remember figures being bandied around that 68% of affected businesses were unaware of the impending changes, and of those that were aware, 64% had not taken any action to prepare.
Now whether those percentages are true or not, it was certainly the case that many businesses had not fully considered the potential impact that these changes would have had. Most notably, and of greatest concern, was the potential cashflow impact on sub-contractors. Under the proposed rules, sub-contractors would no longer charge VAT on their supplies, with the VAT being accounted for under the DRC by the main contractor. As a direct consequence of this, there would be less cash paid into sub-contractor’s bank accounts as payments from contractors would no longer include VAT, and hence the cash flow impact.
The announcement of the deferral was therefore very welcome. But it is only a deferral. At this point in time it is fully expected that the DRC will be implemented on 1 October 2020. There are therefore just 11 months to prepare (again) for this. And while being compliant for VAT purposes and ensuring that VAT is accounted for appropriately is of course important, perhaps the most critical aspect is to ensure that your business has the financial resilience to be able to withstand the cashflow impacts that will arise.
This is also critical from a contractor perspective – if your sub-contractors are in difficulty, what are the repercussions for your business?