Complex new VAT rules for building contractors

George Hay Chartered Accountants

Those operating in the construction and building industry are being encouraged to get to grips with a new way of accounting for VAT.

From 1 October 2019, builders, contractors and other trades allied with the construction industry will have to change the way that they invoice supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain.

Under the new Reverse Charge for construction services (RC) rules, a main contractor must account for the VAT on the services of any sub-contractor, while the supplier does not invoice for VAT.

It is then the customer’s (main contractor) responsibility to account for VAT on the net value of the supplier’s invoice and at the same time deduct that VAT – leaving a nil net tax position.

The intricate new RC rules only apply to other construction businesses that then use them to make an additional supply of building services, and not to end users, such as landlords, retailers or private individuals. The RC also does not apply to associated businesses.

The new legislation, despite its title, will apply to an extensive range of services associated with the building trade, including:

  • construction
  • alteration
  • repairs
  • demolition
  • installation of heat, light, water and power systems
  • drainage
  • painting and decorating
  • erection of scaffolding
  • civil engineering works
  • associated site clearance
  • excavation
  • foundation works.

The legislation also includes a list of exempted works and services:

  • professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
  • drilling for, or extraction of, oil, natural gas or minerals, and tunnelling or boring, or construction of underground works, for this purpose
  • manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to a site
  • manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to a site
  • signwriting and erecting, installing and repairing signboards and advertisements
  • the installation of seating, blinds and shutters or the installation of security.

Announced following a lengthy consultation period, the recently released draft RC legislation, explanatory memorandum and tax information and impact note are intended to prevent missing trader VAT fraud in the construction sector’s labour supply chains.

This is something which HM Revenue & Customs (HMRC) has identified as posing a noteworthy risk to the public purse.

The foremost challenge for those working in the affected trades will be identifying which customers are liable for the RC.

This will require businesses to verify VAT registration numbers and procure proof that a customer is an ‘end user’ or not, so that if VAT is owed it is invoiced appropriately.

This will create a significant new burden that many companies and sole traders may struggle with.

Therefore, businesses affected by the new RC legislation are being urged to plan ahead to ensure that, as suppliers, they do not charge VAT incorrectly or that, as recipients, they apply the RC correctly.

Failure to use the RC appropriately could lead to penalties. Output VAT wrongly applied on an invoice will also be collected by HMRC, but will not be recoverable by the recipient.

Consultation on the draft legislation closed on 20 July 2018. It is expected that a final version will be published before October 2018.

Link: Reverse Charge for construction services