Construction Industry VAT Changes for Recruiters

Recruitment businesses that supply workers to the construction industry have always had special rules with which to comply, making their operation a little trickier than the agencies that don’t operate in this area. Now there are some more changes coming up to create further challenges for these enterprises. 

The Domestic Reverse Charge (DRC) for VAT has been in the pipeline for some while, with its first implementation date intended for 1 October 2019. This was then delayed by a year, due to pressure from the building industry, citing collective unpreparedness. Accordingly the government agreed to a year’s delay, but we know what happened during that deferral period and the introduction was further delayed. But it’s going to happen and it’s soon upon us, with the start date of 1 March 2021 now set in stone.

The DRC is essentially a fraud prevention measure and is aimed at stopping less scrupulous subcontractors disappearing without paying over to HMRC VAT that they have charged to, and have been paid by, their customers. The customers are generally contractors and these tend to be larger and more responsible organisations. So the plan is for the subcontractors not to charge VAT on their invoices and for the customers to account for the VAT that would be due on those invoices under the reverse charge mechanism.

It is expected that most agencies will not be affected by these changes, as they usually supply staff, as opposed to making a supply of construction services, even if the supplies are within the Construction Industry Scheme. Accordingly, most agencies will just have to be aware that these changes are taking place, rather than making alterations to their accounting procedures.

The important point is to understand what constitutes a supply of staff.

A supply of staff may have these features:

• the customer contacts the recruitment business and asks for a certain number of workers for a certain number of days;
• the workers are employed by or engaged by the recruitment business;
• the recruitment business provides an hourly or daily rate for the workers;
• timesheets are used to record the time worked and these are approved by the customer before payment;
• the customer pays the recruitment business and the recruitment business pays the workers;
• the customer manages and controls the work carried out by the workers and has responsibility for that work.

Supplies of building services may include management of the work undertaken, working to a price, rather than on a time basis, and being responsible for correction of defects. Most recruitment businesses will not be operating on this basis.

Until subcontractors and contractors within the construction industry get used to the new VAT rules there may be attempts by VAT-registered subcontractors not to charge VAT and expect the recruitment businesses to apply the reverse charge. Also contractors may resist accepting invoices from recruitment businesses that charge VAT, believing that the reverse charge applies. Recruitment businesses should be prepared to stand their ground and explain their position to both their workers and their clients.

If you have any queries or concerns about the Domestic Reverse Charge, then please get in touch.