Building and Construction Services VAT Reverse Charge: What You Need to Know
If you’re in the building and construction sector, a new change to VAT is coming in October – and we’re here to make sure you’re ready for it. First announced in the Autumn Budget of 2017, a VAT reverse charge for building and construction services will come into play from October 1st 2019 in a bid to prevent criminal attacks on the VAT system within the industry, or ‘missing trader’ fraud; this will be akin to the domestic reverse charge that currently applies to the sale of computer chips and mobile phones.
As a result, when supplying construction services to other VAT-registered businesses, you’ll soon be required to provide a VAT invoice stating that the service is subject to the domestic reverse charge. Recipients must then account for the VAT on that specific supply through a VAT return at the relevant rate (as opposed to paying directly to the supplier); this may be recovered at the same time as input tax.
Who will the changes affect?
While the industry can be complex, this change will broadly affect up to 150,000 UK taxable building and construction businesses concerning transactions where the recipient makes an onward supply of the same services; it will only affect supplies at the standard or reduced rates where payments should be reported through the Construction Industry Scheme (CIS). Where exceptions are concerned, the following supplies are not covered by the reverse charge if supplied on their own:
> The drilling or extraction of oil or natural gas
> Extraction of minerals by tunnelling/boring/construction of underground works
> Manufacturing of building or engineering components/equipment, materials, plant or machinery, or delivery of any of these things to site
> Manufacturing of components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply/fire protection, or delivery of any of these things to site
> Professional work of architects or surveyors, or of consultants in building, engineering, interior/exterior decoration, or the laying out of landscape
> The making/installation/repair of artistic works such as sculptures, murals or other works artistic in nature
> Sign writing/erecting/installation/repair of signboards and advertisements
> Installation of seating, blinds and shutters
> Installation of security systems including burglar alarms, closed circuit television and public address systems
What impact will this have on my business?
While the VAT reverse charge won’t take place until October this year (with HMRC taking a light-touch approach for the first 6 months and guidance offered throughout), it’s worth considering the potential impact this could have on your business ahead of time. To ensure supplies and purchases are correctly treated moving forward, SMEs will need to update their accounting systems to process these reverse charge supplies. Beyond this key adjustment, HMRC have highlighted a number of potential challenges arising as a result:
> For subcontractors of micro businesses, this change will likely have a direct impact on their cashflow as of October – with VAT no longer chargeable.
> Under the new regulation, the recipient will need to identify the correct VAT treatment of the service provided by another contractor, which can often be tricky to verify.
> To establish whether the reverse charge applies, contractors will have to divulge whether they are at the end of the supply chain to their subcontractor – information which could be commercially sensitive.
> If the customer fails to confirm their ‘end user’ status with the supplier, the recipient will be accountable for the domestic reverse charge. It’s not yet clear whether a penalty would apply for not confirming this status, and whether HMRC would take action.
What are the next steps?
There’s no time like the present to take action regarding the VAT reverse charge. Construction businesses can start by reviewing supplies previously made to (and received from) other contactors, and whether these will be subject to the new legislation. In addition, the one-off (and ongoing) costs associated with calculating and reporting the reverse charge should be taken into account. Finally, it’s important for SMEs to acknowledge how this change may affect their cash flow due to the fact they will not receive VAT directly from the contractor – if that contractor is not an end user – and how to alleviate this transition.
For businesses looking to adapt their accounting systems ahead of October, Adams Moore provides leading advice and services dedicated to businesses across all sectors. Speak to us to ensure your building and construction business heads into the autumn VAT-savvy.