A new UK VAT domestic reverse charge for building and construction services

2nd September 2019

Stephen Morgan

The VAT ‘domestic reverse charge’ for specified building and construction services, which was going to be introduced on 1 October 2019, has been delayed by 12 months until October 2020.  Concerns had been raised by industry representatives that businesses weren’t ready, plus HMRC wanted to avoid the changes coinciding with Brexit. It’s more change, but HMRC is trying to combat increasing levels of VAT related missing trader fraud in the industry.

How does the reverse charge work in a nut shell?

It will affect a VAT registered business which receives supplies of specified construction services from a VAT registered business where the reverse charge applies.  This is because the company receiving the supplies must account for the reverse charge VAT on its VAT return.  It comes into effect on 1 October 2020 and it will then be subject to normal VAT recovery rules.

It’s similar to the approach they took when they introduced a reverse charge for the sale of computer chips and mobile phones in 2007.

Invoices which are subject to the domestic reverse charge must state as such.  There is no set wording but HMRC has provided some examples of what is suitable.  For example, “Reverse charge:  Customer to pay VAT to HMRC.”

The new approach moves the liability for accounting for the VAT from the supplier to the customer.  This way the supplier won’t then be able to collect the VAT and then disappear without paying it over to HMRC.

When does it apply?

The domestic reverse charge applies if both the supplier and the customer are registered for VAT AND the payments have to be reported through the Construction Industry Scheme (CIS).  Unlike the CIS deductions the reverse charge applies to the goods and services supplied.  So, in most cases if the CIS applies the reverse charge will apply to the entire invoice value.

It doesn’t apply to consumers but it is in effect throughout the supply chain.  That is until such time that the customer who receives the supplies is not a business supplying construction services.

Furthermore, it doesn’t apply to all services and HMRC has provided a list of those to which it does as well as those that are excluded.  Generally they are construction operations for the purposes of the CIS.

What do affected businesses need to do to get ready for the reverse charge for building and construction services?

If affected, businesses should firstly make sure that their staff responsible for VAT accounting are familiar with the reverse charge and how it will operate.   Then they will also need to ensure that their accounting systems and software can deal with the new approach.

Businesses may also experience an impact on their cashflow.  This is especially if they rely on the VAT they collect from customers for working capital before they pass it on to HMRC.  Then they may need to think about how they will manage without it.  They will need to consider alternatives sources of finance or speeding up their payment terms.

You will also need to assess how the reverse charge will affect your customers and your suppliers.  If you’re a contractor you will need to review all your contracts with your sub-contractors.  Then you will need to decide if the reverse charge applies to the services that they receive under their contracts.  If it does, you’ll need to notify your suppliers.

Sub-contractors will need to contact their customers to get confirmation from them if the reverse charge applies or not.  This should include confirming if the customer is an end user or an intermediary supplier.

Other points to look out for

Businesses will need to be careful that they don’t pay over the VAT to the supplier in error as they will still have to account for it to HMRC.

Customers will need to inform their suppliers that they are an end user.  If they don’t and a supplier doesn’t charge the VAT because they believe the reverse charge applies, then the customer will need to contact their supplier and request a corrected invoice.

All in all an understanding of the implications of the domestic reverse charge is needed and along with a plan of action if you are affected.  HMRC understand that some businesses may experience some difficulties with the changes.  Therefore they have said that they will be sympathetic to this and will adopt a “light touch” for those people who are trying their best to comply.  However, anyone who is considered to be deliberately taking advantage by not accounting for it correctly will face penalties.

If you’re not sure about what you need to do or you need some additional guidance, let us know as we’re here to help.

 

About the author

Stephen is a general practice partner.  He joined Wise & Co in 1994 where he trained as a chartered accountant and became a partner in 2006.  He acts for a broad range of clients.  including many in the property and construction sector.  Stephen is skilled at providing them with practical advice dovetailing technical and commercial expertise.  Outside work, Stephen is a keen sportsman!

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