VAT – The new change affecting building and construction services from 1 October 2019

A big change will be coming into effect from 1 October 2019 for individuals and businesses that are VAT registered and also report to HM Revenue and Customs (HMRC) under the Construction Industry Scheme (CIS).

The domestic reverse charge (also referred as reverse charge) is a major change to the way VAT is collected in the building and property industry. In turn HMRC is looking at eliminating any VAT fraud where suppliers charge VAT to their customers and never declare the VAT on a VAT Return.

This applies to constructions services and supplies of building at the standard or reduced rates for VAT reported under CIS. The reverse charge is applied to the whole services including materials.

The reverse charge means the individual or business receiving the services will have to pay the VAT to HMRC instead of the supplier. The individual or business will recover the VAT under the normal input VAT rules.

For example

Mr Electrician invoices £6,000 including VAT of £1,000 to Construction Limited.

Mr Electrician’s VAT Return

Box 1 nil

Box 6 £5,000

Construction Limited’s VAT Return

Box 1 £1,000

Box 4 £1,000

Net effect nil

Box 7 £5,000

Things to consider

1. If you are the contractor receiving the services from sub-contractors, you must review all your contracts to decide if the reverse charge applies. Those sub-contractors must be notified with starting dates after 1 October 2019.
2. Check out the VAT status by using http://ec.europa.eu/taxation_customs/vies/
3. Check out the CIS registration is valid by using https://www.gov.uk/use-construction-industry-scheme-online
4. Some business may wish to consider monthly VAT returns because they no longer need to pay the VAT over to HMRC but instead be in a repayment position with HMRC.
5. Your end user or intermediary may not be obvious. Businesses supplying construction services must make enquiries to ensure VAT is accounted for correctly.

Other situations

1. Where your services have reverse charge elements and non-reverse charge elements, all will be subject to reverse charge.
2. If your service is zero rated for VAT, reverse charge does not apply.
3. If your customer is not VAT registered in the UK, reverse charge does not apply.
4. If a number of connected businesses are collaborating to purchase construction services, the reverse charge does not apply.

HMRC will be applying a light touch in dealing with errors in the first 6 months i.e. 31 March 2020 as long you have acted in good faith and not deliberating taking advantage, then penalties will not be charged.

Priority actions for businesses and individuals are –

1. Understand the rules and how this applies to your property and construction services.
2. Keep accurate records to support your reverse charge application on your sales invoices.
3. Assess your cash flow for the business and check there is sufficient headroom to meet HMRC liability.
4. Speak to your accountant if you have any queries.

If you need any assistance or have any questions regarding the above please feel free to get in touch: Annie.lee@wsm.co.uk