Construction Industry - IMPORTANT CHANGES
Please note the HM Revenue & Customs have announced the below changes have now been delayed until October 2020. Confirmation can be seen on: https://www.gov.uk/government/publications/revenue-and-customs-brief-10-2019-domestic-reverse-charge-vat-for-construction-services-delay-in-implementation/revenue-and-customs-brief-10-2019-domestic-reverse-charge-vat-for-construction-services-delay-in-implementation
You might have read that HMRC’s new domestic reverse charge for the construction industry comes into effect on 1 October 2019 and will be a major change to how VAT is collected. This will affect the VAT treatment of supplies of building and construction services that are reported under CIS (where both the supplier and customer are VAT registered).
What is changing?
Under the current rules, a subcontractor (supplier) charges VAT to the contractor (customer), collects the VAT from the customer, and accounts for the output VAT on their VAT return. The customer pays the VAT to the supplier and recovers the input VAT on their VAT return.
Under the new rules the subcontractor will invoice the contractor without charging VAT and the contractor will account for both the output and input VAT on their VAT return using the reverse charge (meaning the VAT position is neutral).
If you are acting as a subcontractor providing a qualifying service, your invoice must make it clear that the reverse charge applies and that the customer (contractor) is required to account for the VAT. There is no specific wording but HMRC provide examples of suitable wording:
“Reverse charge: VAT Act 1994 Section 55A applies”
“Reverse charge: Customer to pay VAT to HMRC”
The recommended wording for self-billing invoices is:
“Reverse charge: we will account for and pay the output tax due to HMRC”
Note you will still have to specify on the invoice the amount and rate of VAT to be declared by the customer.
For sales under the domestic reverse charge, the net figure will still be included in box 6, however no output VAT will be included in box 1 of your VAT return.
For purchases under the domestic reverse charge, you will included the input VAT in box 4 and the net purchase in box 7 as usual, but will also record the output VAT in box 1. Note you will not include an entry for net sales in box 6.
Exceptions to the domestic reverse charge
The domestic reverse charge does not apply to specified services if:
The recipient is not registered for VAT
The recipient is not registered for CIS
The services are supplied to an ‘end-user’ (such as the property owner). Note the end-user must inform the contractor in written form to notify them of its end user status, and this notification should be held with retained for future reference
The supplies are zero-rated or exempt.
Where goods and materials are provided together with construction services and in the course of the construction work, the reverse charge applies to the whole supply including the goods. It is not apportioned as it is with CIS payments. Likewise, if there are mixed supplies where only an element would be subject to the reverse charge, the whole supply will be caught by the reverse charge.
You will need to ensure that your accounting system is capable of processing reverse charge supplies;
Subcontractors will potentially suffer from a loss of cash flow and therefore may wish to consider if payment terms need to be revisited;
Subcontractors may become repayment traders (i.e. VAT returns become a net claim from HMRC rather than a net payment). Where this is the case it may be beneficial to switch to monthly returns rather than quarterly.
Reverse charge supplies are not to be accounted for under the flat rate scheme, therefore users of the scheme will have to consider if it is still beneficial to them to be on the scheme when VAT is not being paid to them on some or all of the invoices they issue.
The Cash accounting scheme cannot be used for the supply of services that are subject to the reverse charge. It can continue to be used for all other sales and purchases, but where the reverse charge applies, the transaction for VAT purposes will be based on invoice date and not the payment date.
What should you do?
You need to prepare for the 1 October 2019 introduction date by:
Reviewing supplies made to and received from other VAT registered contractors to establish if these will be subject to the reverse charge, and notifying them if they will.
Obtaining notification from customers that they are an end user and confirmation of their VAT registration and CIS status.
Checking with your software provider how these transactions are to be posted on your accounting system.
Making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate.
HMRC understands that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.
For further information on how the VAT domestic reverse charge may affect you please refer to the detailed HMRC guidance available at https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
If you feel the changes outlined above will affect your business and you would like to discuss in further detail please contact Matt Welsh on 01900 603623 or via email at firstname.lastname@example.org.