The new VAT domestic reverse charge regime for the construction industry will come into force on 1 October 2019.
The reverse charge mechanism will place the responsibility on a contractor to account for the VAT on the services supplied by its sub-contractors – creating a fundamental change to the way VAT is recorded and recovered.
Where a contractor applies the reverse charge, it should not be out of pocket as the VAT accounted for should be recoverable as Input Tax.
Under these new arrangements, the sub-contractor will no longer be paid the VAT. This is intended to reduce ‘missing trader’ fraud, by removing the opportunity for fraudsters to charge VAT and then go missing, before paying it to HMRC.
The reverse charge will apply to businesses which resupply the building services they receive. In other words, it will apply to contractors providing building services who use sub-contractors, rather than ‘end users’ such as developers or homeowners who do not make supplies of building services themselves.
The reverse charge is likely to cause:
- Cash flow issues – many sub-contractors use the VAT paid to them to help fund their own expenditure;
- VAT Liability – VAT can be due on construction services at the ‘standard’ 20 per cent rate, the ‘lower’ 5 per cent rate and the 0 per cent ‘Zero-Rate’ depending on the type of work completed. The reverse charge will not apply in circumstances where the ‘Zero-Rate’ applies;
- Issues in respect of confirming the identity of the ‘end user’ of the construction services.
Construction businesses should consider taking the following actions:
- Review supplies made to and received from other VAT registered contractors to establish whether these will be subject to a reverse charge from October 2019
- Consider the adaptions that will need to be made to their accounting systems to deal with this change
- Consider the impact on their cash flow from October 2019 of not receiving the VAT from their customer and if there are any other ways to mitigate this impact.
Julian Borley, Director of VAT, said: “HMRC has acknowledged that the impact on the construction industry may be significant. As such, it is important that construction businesses adapt their accounting systems to process the reverse charge and make ongoing checks to ensure that supplies and purchases are correctly treated.
“This change in legislation will have significant consequences for the construction industry when it comes into force on 1 October, so it is important to consider the repercussions now, whilst there is time to take any relevant actions”.
To find out more about these changes why not join us at our upcoming free construction industry seminar on 13 June at our offices in Bristol. To find out more, please click here.