In typical construction projects, a construction company’s services are seen as supplied where the construction takes place. So when an overseas contractor is used on a UK project, supplying services in the UK, you might expect that contractor to register for UK VAT and charge UK VAT on the work completed.
You would be wrong.
“A special rule applies for overseas contractors with no permanent presence in the UK but working on a UK construction project where the customer is a UK VAT-registered business,” says Robert Facer, a VAT expert at Moore Stephens. “In that case, the customer has to account for the VAT via a reverse charge, rather than the overseas contractor.”
This point – and the ease with which it can be overlooked – was highlighted in a recent VAT tribunal case, involving a UK hospitality business that used a contractor based in the Channel Islands to refurbish its premises. The contractor was registered for UK VAT, and charged the customer VAT on a VAT invoice. The customer’s subsequent reclaim for the VAT was disallowed by HMRC on the grounds that there should have been a reverse charge transaction instead.
“A UK customer using an overseas supplier faces the risk that the supplier will incorrectly charge VAT on their supply when a reverse charge should have been made instead,” Robert says. “HMRC can disallow any reclaim of VAT paid by the customer to the supplier – as was confirmed in the tribunal ruling. This is the case even if the contractor provides a VAT invoice and accounts for and pays the VAT to HMRC.”
Customers can try to reclaim incorrectly charged VAT from the contractor, but this may be difficult, particularly if a period of time has passed. The contractor may no longer exist or may be in financial difficulties and unable to pay.
“The message is clear,” Robert says. “For UK customers using overseas contractors, the best advice is to not accept any UK VAT charge until they have proper evidence of the contractor’s status. For example, this could include some proof of a permanent presence in the UK in the form of an office and staff. Such evidence is essential in order to be able to support their actions in paying any VAT rather than applying a reverse charge.”
The special rule also has implications for overseas contractors, because if the reverse charge rules apply, the contractor would not normally be able to register for VAT. “But most overseas contractors working in the UK would incur some VATable costs,” Robert says. “They might buy in raw materials or need hotel accommodation for staff, for example. Without a UK VAT registration, the mechanism for reclaiming the associated VAT is slower and more complex, involving a cross-border refund claim for contractors based in other EU member states, or the 13th
Directive refund mechanism for contractors outside the EU.”
For advice on how to minimise the VAT risks arising from the above rules, please contact Robert Facer
in our VAT team.