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Change in Construction Industry: VAT Reverse Charge

The VAT domestic reverse charge for building and construction services comes into effect from 1 October 2019. Although some of the detail may change in the months to come, given the scale of the changes envisaged, it would be appropriate for businesses to start planning for them now.

Nicola McCartan, a member of the Chartered Institute of Taxation and the Association of Taxation Technicians, at M. B. McGrady & Co Chartered Accountants is providing advice and guidance to clients working within this sector. To help businesses prepare, Nicola answers some of the most common questions being asked by building and construction clients about the new VAT changes.

Overview

If you’re VAT registered, new procedures are being introduced on 1 October 2019, which affect any construction business that buys/sells construction services from/to other builders. With current rules, a builder charges VAT to their builder customer but from October the builder will invoice their builder customer without charging VAT.

Who does the VAT reverse charge for construction services apply to?

It applies only to VAT-registered businesses who are registered with the CIS and use the CIS to report payments. In other words, it applies to services supplied between the majority of construction sub-contractors and contractors in the UK.

If your CIS business is the recipient of construction services, and receives an invoice with the reverse charge applied, then you account for the VAT amount as part of your overall input tax, as if you’ve charged it to yourself.

If your business is not VAT registered then the reverse charge cannot be applied to you, and standard VAT rules apply for the supplier (so they will charge you the VAT and account for it as usual). If you’re not VAT registered, you should make it clear to the supplier in writing.

Crucially, reverse charges do not contribute to a company’s potential VAT threshold. So, if you aren’t registered for VAT then any attempt to apply the reverse charge will not push you over the limit.

Notably, the reverse charge also doesn’t apply to end users, such as the people who use a building that’s been constructed by the provided services, and nor does it apply to some of those connected to them, such as landlords or tenants.

Who does the scheme affect?

The Domestic Reverse Charge will apply to work such as; construction, demolition, repairs and alterations, drainage, painting and decorating, scaffolding, the installation of heating, lighting, water and power. It will also affect civil engineering, site clearance, excavation and foundations works.

The rules will apply to ‘construction services.’ It also includes goods supplied as a single package which includes construction services, including building materials.

What services are excluded?

For some services there will be no change in the way invoicing works, including the installation of seating, blinds, shutters and security systems. Also, the professional services of architects or surveyors and consultants of building and engineering, will not be affected although the definitive list is yet to be clarified.

How does the domestic reverse charge work?

Suppliers will no longer be required to charge or receive VAT from their main contractor customers.  If a contractor receives a service subject to the VAT reverse charge from its subcontractor, it must account for the VAT in box 1 of its VAT return, and also recover it simultaneously on the same return in box 4, subject to the usual rules on input tax deduction.

Preparation

Construction businesses will need to ensure their accounting systems are capable of processing reverse charge supplies. As the VAT amount must still be shown on invoices subject to the domestic reverse charge, there is a risk that suppliers will still account for the VAT to HMRC in error and likewise customers will still recover it from the Revenue.

Subcontractors that rely on VAT collected from their customers as working capital until they have to remit it to HMRC are likely to suffer from the loss of cashflow. These businesses will need to consider if payment terms need to be revisited to avoid any problems in the supply chain this could cause.  If the business is generally in a VAT repayment position if may be better to switch to monthly VAT returns so repayments are received earlier.

Before these new rules take effect, construction businesses would be wise to:

  • Review supplies provided to, and received from, other VAT-registered contractors to establish where these will be subject to a reverse charge from October 2019
  • Obtain notification from customers, with details of their VAT-registration status, construction industry scheme status, and confirmation that they are the end-user
  • Consider any adaptations required to ensure accounting systems can deal with this change
  • Reflect on the negative effect on cashflow from October 2019, and ways to mitigate it.

Most accountants can help you navigate the complexities of the construction industry scheme and keep you compliant with the tax authority.

Want to know more?

There is a temptation to keep putting the issue to the back of our minds, but change is coming, and businesses really need to make the next few months count, to ensure that they are ready for the change.

With offices in Belfast, Downpatrick and Newtownards, M. B. McGrady & Co Chartered Accountants represents a diverse range of clients from across the building and construction sector. The team will work with you and for your business, ensuring that the simplest of procedures are implemented, while also ensuring that you meet your statutory legislation and audit obligations.

For more information please contact Nicola McCartan, Chartered Accountant, Tax Advisor and Construction Sector Specialist at [email protected] or on 028 9031 6950