In less than a month’s time, significant changes will come into force for those in the construction industry when VAT moves to a ‘reverse charge’ system. Designed to combat missing trader VAT fraud in supply chains, these changes will come to force on 1st October 2019 and we wanted to take a look at just what the changes are and which sectors of construction they will affect.
What is the ‘Reverse Charge’?
The aim of the new ‘reverse charge’ regulation is to eliminate the problem of sub-contractors disappearing while owing money to HMRC. By ensuring that the main contractor, or customer, accounts for the VAT on the services of sub-contractors, it removes the need for suppliers to invoice for VAT. Now, VAT will be accounted for by the main contractor on the net value of the supplier’s invoice, while at the same time deducting the VAT to leave a nil net tax position. Those of you familiar with cross border VAT accounting will notice the similarities and indeed, it is also referred to as the domestic reverse charge.
Who and which businesses will it impact?
The domestic reverse charge system will only affect those who are contractors or sub-contractors registered for VAT and whose payments are required to be reported through the Construction Industry Scheme (CIS).
If you’re a contractor, now is the time to look through your existing contracts and decide if the reverse charge will apply. For subcontractors, getting in touch with your customers will help you define whether or not the reverse charge applies and confirm which customer is an end-user and which an intermediary.
Who won’t be affected?
If you’re an end-user, (currently defined a person who uses building and construction services for themselves) you will not be affected. Extended legislation also means that those connected to end-users, such as landlords and tenants, are also excluded. If you’re zero-rated or not registered to pay VAT, the reverse charge doesn’t apply.
How can I prepare?
A good starting point is to check through your contacts and contracts to see which ones will be affected. Review your accounting systems and ensure that any staff who might deal with VAT issues are fully informed which will help you avoid any administrative errors. Once you have assessed how you will be affected, check whether or not this will affect your cash flow as this is a possibility.