As of 1 October 2019, HMRC’s new domestic reverse charge VAT for certain building and construction services in the UK will come into force, meaning that the recipient of the services will be liable to pay VAT on the service to HMRC, not the supplier. As the change comes into effect without a transitional period, this will inevitably influence a construction companies cash flow as well as being a significant administrative burden as the new legislation will change the way companies in the industry will invoice clients and pay tax.
Why are HMRC changing the way VAT is collected?
Missing trader fraud and the increasing number of subcontractors who are becoming insolvent, owing significant sums in unpaid VAT, are just some of the reasons why HMRC are introducing the changes. As the effects of unpaid VAT are detrimental to the public purse, the changes aim to reduce the amount of monies lost, meaning more money to fund public services such as schools and hospitals.
Which services are affected by the domestic reverse charge?
The services affected under the new regime include the building and construction services supplied at the standard or reduced rates that also required to be reported under CIS (Construction Industry Scheme), known as specified supplies. Under HMRC, these specified supplies include:
- repairs & alterations
- civil engineering
- painting & decorating
- services which form an integral part of completion services e.g. laying foundations, erection of scaffolding, site clearance and the provision of roadways and works access
- the installation of security systems
- the professional work of architects and surveyors
- the manufacture of building or engineering components, sculptures murals and other artistic works
It is worth noting however, that reverse charge only applies to the whole service where materials are included in that service. However under CIS, payments to net status sub-contractors are apportioned and there are no deductions on the materials.
When does the domestic reverse charge not apply?
The first thing to note, is that the domestic reverse charge is only applicable to businesses who are VAT registered in the UK. It does not apply on zero rated VAT services. The new rules also do not apply to intermediaries or the end user, meaning that the rules are only applicable when businesses are supplying their construction or building services to another business who sell these on.
How can you prepare?
Ahead of the new legislation, businesses in the construction industry should be contacting existing customers and contractors to check their VAT registration and CIS status. If they are the end user the reverse charge will not be applicable. Businesses should also be educating their staff who are responsible for VAT accounting on the reverse charge prior to it’s introduction, as although HMRC have allowed a period of 6 months to apply a ‘light touch’ approach to any errors, businesses will be accountable for their VAT returns.
Finally, and most importantly, businesses seriously need to consider the effect the new reverse charge will have on their cashflow and put appropriate actions in place to mitigate any risks. One of the ways businesses can do this, is by reviewing their accounting software and ensure that their existing software is able to deal with the changes.
Want some advice on how your business will be affected by the changes?
For further information on the reverse charge VAT changes and how to make sure your business is prepared and ready for 1 October 2019, please contact Mark Hunter or one of the Murray Harcourt Business Advisory team.