30 May 2019
In response to increasing VAT fraud affecting the construction industry the government is introducing this new measure on 1 October 2019. Up to 150,000 businesses will be affected and will need to make preparations.
Missing trader fraud has cost many EU countries billions of pounds in lost VAT. The fraud is quite simple; a business charges VAT on a supply, collects the output tax from the customer and then disappears without paying it over to the tax authorities. Goods that have been targeted in particular by the fraudsters include mobile phones and computer chips, especially cross-border trade in these goods. As usual, when one fraud is subjected to a clamp-down the criminals turn their attentions to another domain, in this case the construction industry. Fraudsters are attracted especially by the labour-only supply aspect, where no input tax is incurred on their costs, but VAT is charged to their customers.
The extent of the fraud can be judged by the fact that HMRC’s memorandum explaining the measure estimates that it will save between £90m and £135m per annum.
Not so simple
In principle the VAT Reverse charge should be a simple but effective solution. Where a supplier in the construction industry makes a business to business supply, instead of charging VAT at the applicable rate it states on the invoice that the supply is subject to the VAT Reverse Charge. The customer is then responsible for paying the VAT to HMRC, but as it is also able to reclaim the VAT as input tax, there should be a net zero effect. The only requirement will be to declare the amount of tax on the VAT return. In practice, as always with VAT, there will inevitably be complications. Accounting systems will not necessarily cope with the concept, and there is the rather complex issue of working out which supplies should be included in the scheme.
The key word is ‘services’
The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector. The definition of construction services is lengthy but familiar as it coincides with that used for the CIS scheme. The charge only applies to certain construction services that are subject to the standard rate (20%) and reduced rate (5%) of VAT and not to zero-rated supplies. The key word is ‘services’. The charge does not apply to building and construction materials supplied separately and independently of construction services. However where a supply comprises both materials and services the whole supply is subject to the reverse charge rules.
Types of supply also falling outside the scope of the Reverse Charge are those:
- not made to construction companies,
- made between connected companies,
- made by landlords to tenants or vice versa.
- made where the construction services are provided to a consumer of those services (i.e. supplied to a business that has commissioned the construction of a new building).
- of specified construction services that are not used to make an onward supply of construction services.
To summarise, in effect the new rules only apply to businesses that are supplying their construction services to other businesses who will sell on those construction services. In all other situations normal VAT rules will apply.
HMRC acknowledges that the Reverse Charge will place additional burdens on about 100,000 to 150,000 businesses. As well as requiring changes to traders’ sales administration and accounting systems, there will be a need for training of staff. Also, although not good practice, it is a fact that some businesses use as a source of working capital the VAT collected from their customers but not paid to HMRC until a later date. So some businesses will experience cash flow problems
Other potential problems include the fact that it will become the responsibility of the recipient of the service to decide whether the supply is at the standard rate or the reduced rate, and, to determine whether the supply is subject to the charge, a contractor will have to disclose to its subcontractor the fact that it is not the end user, a matter that could be commercially sensitive.
The Reverse Charge will come into force on 1 October 2019. To prepare for this you should:
- Review recent supplies and ascertain whether similar supplies will in future be subject to the charge.
- Ensure that you and your staff team are clear about the new rules.
- Contact regular customers and suppliers who might be affected.
- Contact the supplier of your accounting software to check that it will be compliant with the new rules.
For further information about this topic, please call Martin Johnson on 0191 567 8611 or e-mail email@example.com.
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