The Reverse Charge VAT for Building and Construction Services: A Guide04/Jul/2019
In an effort to tackle VAT within the construction industry from 1 October 2019 HMRC’s new Construction Services Domestic Reverse Charge (“CSDRC”) will be rolled out, prompting changes that will have a significant impact on both VAT accounting and cashflow management for affected businesses.
Legislation in this respect has been finalised in recent weeks and at present there is no proposed transitional period (other than the six-month ‘light touch’ policy to be adopted by HMRC outlined below) – it is therefore vital that applicable businesses are prepared given the short timeframe and scope of those exposed to the measures.
With effect from 1 October 2019 businesses supplying certain specified construction industry services to VAT registered customers will no longer be required to account for VAT - instead the customer accounts for VAT under a ‘reverse charge’ arrangement as if they had made the supply to themselves and, on the most part, recover the same amount as input tax.
Given the intention is to prevent missing trader fraud (i.e. output VAT not finding its way to HMRC) this will only apply where the ‘customer’ is another contractor – it does not apply to an ‘end user’ customer (i.e. where the supply is for their own use rather than for resale) and only applies to supply subject to either standard or reduced rate VAT.
As a general rule of thumb, businesses affected are those that currently fall within the requirements under the CIS framework. It will not however apply to businesses not required to be registered for VAT (if they are under the registration threshold for example) and amounts accounted for under the scheme will not count towards the VAT registration limit - therefore if a customer isn’t required to be VAT registered for VAT this won’t make them.
Supplies covered include (but not limited to):
- Construction, extension, demolition, alteration or repair of buildings or of any works forming part of the land
- Installation in any building (whether or not in the course of construction) of a heating, lighting, air conditioning, power, water, drainage system etc.
- Internal cleaning of buildings (so far as carried out in the course of construction, extension, etc.)
- Painting or decorating the internal or external surfaces of any building
As mentioned above, HMRC will apply a ‘light touch’ policy to enforcement of these measures with errors arising where businesses are seeking to apply the legislation. If found to be knowingly avoiding the measures there is scope for HMRC to apply penalties in line with those currently in place for VAT non-compliance.
Factors to Consider
Bookkeeping: We expect accounting software providers to distribute directions around updates or similar required to ensure compliance, however it is not yet clear if and how accounting software packages will adapt to these changes to ensure compliance on a timely basis. At present most will have a mechanism for dealing with the EU reverse charge scheme so similar functionality is likely, but detailed guidance on how to deal with this specifically anticipated from the major software players in the coming months.
Cashflow: A number of businesses in this industry rely on output VAT to support cash flow and working capital between the time payment for supply is received and paid over to HMRC. Under this mechanism this option is clearly limited. It may however mean that suppliers who are normally subject to VAT liabilities at present find themselves in a consistent VAT repayment position, and as such might consider the transition to monthly returns to expedite the reimbursement of input VAT to remedy this.
If you think your business may be affected by these changes and have any questions or concerns, please give us a call.