Analysing the changes to VAT and construction
A major change in the way that VAT is accounted for in the building and construction sector takes effect later this year.
The VAT domestic reverse charge for building and construction services will apply from 1 October 2019. This is an anti-fraud measure – an administrative change, impacting invoicing and VAT return procedures. With a reverse charge, any VAT-registered recipient of services accounts for VAT rather than the supplier.
This means that the supplier – here, a VAT-registered subcontractor – will state on its invoice that supplies are subject to the reverse charge. The contractor then uses its VAT return to account for output VAT on the supplies received, instead of paying output VAT to the supplier. Subject to normal VAT rules, the contractor can then reclaim VAT on the supplies received as input tax. In most cases, this will leave no net tax payable on the transaction. Where there is an ‘end user’, it will be expected to provide notification of end user status to suppliers. This signals that suppliers should charge VAT in the usual way.
The charge affects VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used along the supply chain, until the recipient is no longer a VAT-registered business making an onward supply of specified construction services. The rules call this an ‘end user’. The reverse charge will not affect zero-rated supplies. It will not apply to services provided to end users. Neither will the reverse charge apply in some circumstances to ‘intermediary suppliers that are connected or linked to end users’, for example landlords and tenants.
The reverse charge covers ‘specified services’ – essentially, construction services as defined for CIS purposes. Where services – such as those of architects, surveyors and some consultants – are supplied on their own, they are not covered by the reverse charge. If provided along with supplies subject to the charge, however, the whole supply will be subject to the charge. The reverse charge also includes goods, where supplied with specified services.
HMRC has issued technical guidance: bit.ly/2WHQ5R2, and we recommend planning for change now – for example, by adapting accounting and IT systems to cope. You may also need to consider the impact that the reverse charge will have on business cashflow.
Please don’t hesitate to contact us for further advice.