Non-established/overseas businesses undertaking construction service activities in the UK

The UK’s departure from the EU has provided additional reason for overseas businesses carrying out ‘construction services’ in the UK to consider their UK VAT registration obligations.

This is a highly complex area of VAT, considering the application of the place of supply rules relating to land and land-related services, including construction services. Furthermore, this is particularly the case when the business has no UK fixed establishment from which to make these supplies.

This article explains why overseas businesses should now be reconsidering their UK VAT registration obligations. We explore the requirement for UK VAT registered businesses operating in the construction sector to consider the application of the UK’s domestic reverse charge rules for construction services which, after a delayed introduction, now applies to relevant supplies from 1 March 2021.

Non-Established Taxable Persons (NETPs) – UK VAT registration obligations

Supplies relating to land are subject to specific VAT rules, including place of supply rules, which can complicate the decision of whether to register for UK VAT, especially for overseas suppliers. In the next sections we will examine the cornerstones which set out the basis for a UK VAT registration where supplies of land and land-related services are concerned.

Firstly, however, it is worth highlighting the basic principles which underpin the obligations for a non-UK established business trading in the UK as an overseas supplier. A nil VAT registration threshold applies to all overseas businesses (referred to as NETPs) trading in the UK. When such a business makes any taxable supplies in the UK, it must register for VAT in the UK and account for UK VAT to HMRC on relevant supplies.

An Irish resident business will be treated as NETP where it:

• Does not have a UK establishment, for example, a branch in the UK.
• Is not incorporated in the UK, if it’s a company.

Supplies of land v supplies of land-related services

Businesses operating in the construction services sector must be aware of the fundamental distinction between supplies of land and supplies of land-related services, as the application of the place of supply rules can impact UK VAT registration requirements.

A ‘supply of land’ and the place of supply rules

Starting with the place of supply rules governing a ’supply of land’. In the UK, a supply of land is recognised as comprising of a grant of an interest in or right over or a licence to occupy land in return for a payment or consideration. The starting position is that such a supply is VAT exempt, subject to the option to tax which if exercised over the interest will render a supply taxable. In addition, there are also a number of exceptions to this general rule, including the letting of hotel accommodation or the grant of the right to fell and remove timber which are compulsory standard rated supplies in the UK (without an option to tax).

Under the place of supply rules, a ’supply of land’ is treated as taking place where the land is situated. As such, an overseas business which makes a taxable supply of land located in the UK should consider their UK VAT registration obligations.

A supply of ‘land-related’ services – place of supply rules and implications for NETPs

A supply of construction services, which can include site preparation, alterations, dismantling, construction, repairs, decorating, demolition, and installation, is generally accepted to be a supply of land-related services. The supply of land-related services can, in certain circumstances, cause overseas suppliers a UK VAT registration requirement.

Under the general place of supply rules for services, an Irish business making a supply of services to a business recipient outside of Ireland makes supplies which are outside the scope of Irish VAT. A UK VAT registered recipient of these supplies would account for UK VAT under the reverse charge mechanism and the Irish business will avoid the need for a UK VAT registration. However, the rules for ‘land-related services’ are more complex, and the specific nature of each supply must be considered in assessing the UK VAT registration requirements.

Land-related services – EU and UK interpretations

The rules on the place of supply of land-related services, that is services connected with immovable property stem from EU regulations which explain that, for services to be considered ‘connected to immovable property’:

• There must be a direct connection to property, and
• The connection must be to a specific property.

In Revenue and Customs Brief 22/12, and its guidance, HMRC’s interpretation distinguishes between:

• Services ‘directly related to land’
• Services ‘only indirectly related to land’

Services ‘only indirectly related to land’ are treated under the general rule for business-to-business (B2B) supplies of services, giving no UK VAT registration obligation for the overseas supplier.

On the other hand, a supply of services ‘directly related to land’ in the UK may give rise to a UK VAT registration obligation for the NETP.

HMRC define the concept of services ‘directly related to land’ in their guidance as, ‘services which relate directly to a specific site of land or buildings, that is those services derived from land and where the land is a central and essential part of the service or where the service is intended to legally or physically alter a property’ (HMRC VAT Notice 741A, para 7.3).

HMRC also provide some examples of services ‘directly related to land’. These include:

• Construction and demolition of a building or permanent structure
• Maintenance, renovation, and repair of a building or permanent structure
• Surveying and assessing property
• Providing accommodation in hotels, holiday camps, camping sites or timeshare accommodation

If I am an NETP supplying directly related to land services to a UK customer do I need to register for VAT in the UK?

The answer to this is, ‘No, not always’. Overseas businesses supplying construction services which are directly related to land do not always have a UK VAT registration obligation.

HMRC’s guidance specifically covers this point where the customer belongs in the UK and is UK VAT registered (HMRC VAT Notice 741A, para 7.6). A mandatory UK reverse charge applies in this case with the UK customer self-accounting for the UK VAT. As such, an Irish supplier, being an overseas supplier, would avoid having to obtain a UK VAT registration in this instance.

From an overseas supplier perspective, it is imperative that you know the status of your customer. It may be that the customer does not ‘belong’ in the UK and/or they may not be UK VAT registered, in which case, the mandatory reverse charge would not apply and the overseas supplier would be required to be UK VAT registered.

UK supply and install contracts – implications for NETPS

It was noted earlier that an overseas business supplying only ‘land-related services’ would avoid a UK VAT registration where its supplies are made to a business that belongs in the UK and is UK VAT registered.

However, where an overseas business undertakes a supply and install contract for works at a site in the UK, it faces an additional task of deciding whether it has a UK VAT registration obligation. For supply and install contracts, the overseas supplier must consider the additional complexity of whether they are performing ‘land-related services’ or whether they are installing goods.

Where goods are supplied (and installed) together with services, HMRC’s view is that two types of supplies are made (VAT Notice 741A, para 7.8):

• A supply of land related services - there will be a supply of land-related services where the service element is the dominant part of the supply (or becomes the dominant part of the supply), with the supply of goods being incidental. The costs of the services compared to the costs of the goods may be indicative as to which is the dominant part of the supply, and it is likely that the service element will be the dominant part of the supply there is significant consultancy, design or diagnostic work, bespoke alteration or adaptation included in the contract.

An Irish supplier, as an overseas supplier, would not be required to UK VAT register in this scenario where they carry out activities in the UK for a UK resident and UK VAT registered customer.

• A supply of installed goods - where the supply is one of standard goods with installation, without any alteration to meet the specification of the client, the business will be providing goods to which the installation service is ancillary.

The place of supply of installed goods is where the installation takes place and therefore this creates a UK VAT registration obligation for the overseas supplier. With effect from 1 January 2021, this presents a notable change. Prior to that date, an EU supplier could have availed itself of the EU VAT supply and instal simplification whereby, on notifying HMRC with the details of their UK* contracts, the UK customer could have self-accounted for the UK VAT under the reverse charge, thereby removing the obligation of the EU supplier to register for UK VAT.

From 1 January 2021 this simplification is not available for EU businesses and they can only rely on the more limited simplification arrangement for installed or assembled goods imported from a third country. This simplification is such that so long as it is a one-off supply, the supplier can exceptionally treat the customer as acting as the importer of the goods and the full contract price can be declared on the import entry. This does have the effect of increasing the value on which import duty may be charged, compared to the simple importation of the goods.

* Under the Northern Ireland Protocol, EU businesses installing or assembling goods in Northern Ireland can still avail themselves of the EU VAT simplification relief covering the supply of installed goods.

VAT – the UK’s Domestic Reverse Charge (DRC) on ‘construction services’

From 1 March 2021, all businesses registered for VAT in the UK which supply ’specified services’ to another UK VAT registered business for onward supply, will be required to issue a VAT invoice stating that the service is subject to the DRC. This means that no VAT is charged, with the UK VAT registered recipient accounting for the UK VAT due on that supply through its VAT return. The recipient may recover that VAT amount as input tax, subject to the normal rules.

The rules were introduced as a measure to combat missing trader fraud in the construction sector and the services to which they apply are broadly aligned to the rules for the Construction Industry Scheme (CIS). CIS is a withholding tax broadly similar to Relevant Contracts Tax (RCT) which operates in Ireland. Like RCT, CIS is widely defined and includes site preparation, alterations, dismantling, construction, repairs, decorating, demolition, installation, etc.

The important thing to note going forward for a NETPs making supplies of constructions services in the UK, is that they must also now consider the DRC rules and assess whether their supplies qualify as ’specified supplies’ for DRC purposes. It may be that the overseas supplier may make a mixture of supplies – only some of which are within the scope of the DRC, depending on the nature of the activities undertaken and whether the customer has an ‘end user’ status i.e., they will be consuming the services at a site from which they operate their trade rather than receiving these services for the purpose of making an onward supply of them.