VAT Reverse Charge

15 July 2019

In October 2019, HMRC will be introducing a domestic reverse charge in the construction industry in an attempt to tackle fraud. 

Applying to certain building and construction services, the legislation will see the customer being liable to account for the VAT in purchases rather than the supplier.

What is the VAT reverse charge?

The VAT reverse charge will come into effect across the UK in October 2019 and has been introduced by the government to combat missing trader fraud, a problem that has run through the industry for quite some time.

The new rules will mean that VAT will no longer flow between construction businesses. Come October, for every affected transaction that is made, the VAT will be stated on the invoice as a reverse charge.

This means that rather than the supplier charging and accounting for the VAT, it will be the recipient of the supplies who will account for the VAT.

Which construction businesses will be affected by reverse charge VAT?

The reverse VAT charge will apply to ‘specified’ construction services between VAT registered businesses where the recipient then makes an onward supply of those ‘specified’ services. These services will be undertaken by businesses who operate within the Construction Industry Scheme (CIS), and include:

  • Construction, alteration, repair, extension of a building
  • Painting and decorating
  • Demolition of buildings, civil engineering
  • Installation of heating, lighting and air-conditioning.

The legislation is designed so that if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge.

Contractors and sub-contractors who supply their services to larger contractors will mainly be affected by the changes.

How will the reverse charge affect businesses?

Construction businesses will need to make sure their accounting systems are fully equipped for the new legislation and are capable of processing reverse charge supplies, whilst making regular checks to ensure that supplies and purchases are correctly managed.

Any business affected by the new rules will need to adjust their accounting systems to include a tax code for all reverse charge transactions. By doing this, the accounting treatment will be correct; ensuring that all VAT returns are compliant.

Subcontractors who are reliant on VAT collected as part of their cash flow may suffer financially as a result of the reverse charge. Many businesses currently rely on the additional 20% as working capital before paying it over to HMRC on their quarterly VAT return.

What should construction businesses do?

If you think you will be affected by the introduction of the reverse charge VAT mechanism, it’s important to make the necessary changes and understand the day-to-day impact the change will have on your business.

Businesses should begin to:

  • Review supplies made to and from other VAT registered contractors to establish whether these will be subject to a reverse charge from October 2019. A confirmation of their VAT registration and CIS status is a credible source.
  • Consider the adaptions that will need to be made to their accounting systems to deal with this change.
  • Think about the changes to your cash flow from October 2019 after no longer receiving VAT from your customer and if there are any other ways to mitigate this impact.

For more information on the changes to the way business in the construction industry will operate and how to be fully prepared for the VAT reverse charge in October, contact a member of our tax team today.