HMRC is changing the way in which building contractors will account for VAT, on some of their supplies, from 1 October 2019.
Businesses that undertake either of the following activities, will be required to comply with the new rules:
- Buys in construction services, from other builders, then makes an onward supply of these services to another customer.
- Sells construction services to other builders, where those builders then make an onwards supply of those services to their own customer.
The changes have come about, because of HMRC’s concern that some supplies are prone to VAT fraud; for example, where the supplier charges VAT to the customer and receives the money, but never declares it on a VAT return.
Under current rules, a builder charges VAT to a customer, collects the VAT accordingly and accounts for it within the relevant VAT return.
The introduction of the ‘reverse charge’ procedure means that from October, the builder will invoice his customer without charging VAT and the customer will make the necessary entry on his own VAT return.
The rules will apply to ‘construction services’, the definition of which mirrors that used for the Construction Industry Scheme (CIS).
The domestic reverse charge will affect supplies at the standard or reduced rates of VAT (either 20 per cent, or 5 per cent), where payments are required to be reported under the CIS.
This typically constitutes construction work on permanent or temporary buildings/structures and civil engineering works. For example:
- Installation of systems for heat, light, power, water or ventilation
- Painting and decorating
Certain services are excluded from the rules, including where the recipient is not registered for the CIS, where the supplies are zero-rated and where the supplier and recipient are landlord/tenant. A full list of exclusions can be found here.
As a result of the changes, many construction businesses will find themselves in a position whereby they must identify instances where they supply services to other businesses in the sector (rather than to a consumer of those services) and determine whether these fall within the list of specified services.
Businesses that are caught by the reverse charge VAT will no longer charge VAT on their services; instead, the recipient will charge themselves VAT.
Those affected will need to ensure that their accounting systems are capable of processing reverse charge supplies and be committed to carrying out regular checks to ensure that supplies and purchases are correctly treated.
Construction services may be charged VAT at different rates dependent upon what work is being undertaken i.e. 20 per cent, 5 per cent, or zero-rated. The onus will now be on the contractor, to verify the correct rate to be used for the reverse charge (or if it is to be used at all).
Subcontractors may need to consider the loss of cashflow, as a result of the changes. Using VAT to fund cashflow, between the time it is received and the time it has to be paid over to HMRC, will no longer be possible.
Subcontractors will also be responsible for confirming that they are working for a VAT registered business and whether they are working for an end user, or for someone connected to an end user, including landlords and tenants.
Overall, the new rules mean that the construction sector is likely to face considerable scrutiny from HMRC, in the foreseeable future. It may therefore be wise to evaluate VAT and CIS compliance across the board.
HMRC has confirmed that it will apply a light touch approach, when dealing with errors that occur in the first 6 months after introduction, but only when businesses are seen to be trying to comply with the new legislation.
However, businesses that knowingly claim end user status, when the domestic reverse charge should have been applied, will still be liable for the output tax that should have been paid and may incur penalties.
How can George Hay help?
We can help those affected to make any necessary changes, in respect of accounting procedures and software, to accommodate the new rules.
Our experts will also work with you to ensure that you know how to process affected transactions correctly, after 1 October 2019.
With the implementation only a matter of weeks away, it’s worth speaking to any VAT-registered subcontractors you work alongside, to ensure that they know exactly what is required of them under the new rules.