The introduction of the VAT domestic ‘reverse charge’ for building and construction services comes into effect from 1 October 2019. This is an important change for all organisations working in the construction industry and has brought tax back into the spotlight within the sector.
The impact of these changes are wide-ranging; it is crucial for organisations operating within the construction industry to start planning now, to ensure they are ready for the changes.
The reverse charge represents part of a government clamp-down on VAT fraud. Large amounts of VAT are lost through ‘missing trader’ fraud. In this type of fraud, VAT is charged by a supplier, who then disappears, along with the output tax. The VAT is thus lost to HMRC. Construction is considered a particularly high-risk sector because of the potential to make supplies with minimal input tax but considerable output tax.
The reverse charge does not change the VAT liability: it changes the way that VAT is accounted for. In future the recipient of the services, rather than the supplier, will account for VAT on specified building and construction services. This is called a ‘reverse charge’.
The reverse charge is a business to business charge, applying to VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used through the CIS supply chain, up to the point where there is a sale to an ‘end user’ (a business that does not make supplies of construction services) or a domestic customer. HMRC guidance suggest that the end user should inform the contractor in a written form of its status so that the contractor accounts for VAT in the normal way.
Broadly then, the reverse charge means that a contractor receiving a supply of specified construction services has to account for the output VAT due – rather than the sub-contractor supplying the services. The contractor then also has to deduct the VAT due on the supply as input VAT, subject to the normal rules. In most cases, no net tax on the transaction will be payable to HMRC.
The charge affects only supplies at standard or reduced rates where payments are required to be reported via CIS. It does not apply to exempt or zero rated supplies.
Planning for change
The new rules will have a significant effect on VAT compliance and cash flow. We, therefore, recommend planning to accommodate this well before the October deadline. Key areas to consider now include:
• Is the reverse charge likely to apply to supplies to and from other VAT-registered contractors and sub-contractors you deal with?
• How will your accounting systems calculate and report reverse charge supplies?
• How will you check on an ongoing basis that supplies and purchases are treated correctly?
• Will your cash flow suffer if you no longer hold output tax, and what can be done to compensate for this? Should you move to monthly VAT Returns if you are in a repayment position?
• What training will staff require to deal with the new rules?
• Is there additional information you will need from your customers and how will you obtain this?
• If you use the VAT Flat Rate Scheme, how will the charge impact you?
How we can help
The information above is only an overview. We should be pleased to review your businesses circumstances to guide you through the changes and how they will affect your business.