The VAT domestic reverse charge for building and construction services comes into effect on 1 October 2019. Given the degree of change, it would be beneficial for businesses to begin planning for the reverse charge now.
The reverse charge stems from the government’s need to minimise VAT fraud. The majority of lost VAT is through ‘missing trader’ fraud whereby VAT is charged by a supplier who then disappears, meaning the VAT never arrives at HMRC. VAT liability will not be changed by the reverse charge, just the way it is accounted for.
In simple terms, a contractor receiving a supply of specified construction services will have to account for the output VAT due, rather than the person supplying the services. The contractor receiving the services must then deduct the VAT due as input VAT, as per the usual rules. Usually, no net tax on the transaction will be payable to HMRC.
As of 1 October 2019, a VAT registered construction business receiving a supply of services, for onward sale:
• Should account for the output VAT on supplies received through its VAT return
• Does not pay the output VAT to its suppliers on receiving supplies
• Can reclaim VAT on supplies received as input tax, subject to the usual VAT rules.
Consequences for businesses
All construction businesses will need to have processes in place to ensure their VAT accounting systems are compliant with the requirements of this reverse charge. The new rules require verification checks to determine the VAT status of businesses, CIS registration and ‘end user’ or ‘intermediary supplier’ status. The impact on business cash flow and liquidity should be evaluated, as output VAT currently provides many businesses with a positive cash flow advantage.
Switching to a monthly VAT return cycle to fast forward payments from HMRC might be beneficial to some businesses. The VAT Flat Rate Scheme may no longer be of benefit and the reverse charge transactions cannot be dealt with via the Cash Accounting Scheme.
HMRC has issued technical guidance, which can be found here .
Where businesses are doing their best to comply and act in good faith, HMRC will adopt a gentle approach to genuine mistakes and penalties in the first six months. Any business claiming ‘end user’ status, when the reverse charge should have been applied, will be liable for the tax due and any potential penalties.
What you should do
• Establish when the reverse charge is likely to apply to supplies to and from VAT registered contractors and sub-contractors. Before applying the reverse charge, you must be satisfied that the customer is VAT-registered, and the contract is within the CIS
• Ensure that all invoices must specify that the reverse charge applies
• Consider any training your staff will need to deal with the new rules
• Assess the cash flow consequences on your business if you no longer hold output tax. As mentioned above, switching to a monthly VAT return cycle may be of benefit
This change may mean that the construction sector is likely to come under scrutiny from HMRC for the foreseeable future.
For any further information, please contact us.