Are you ready for the Construction Industry Scheme VAT reverse charge?

VAT construction reverse charge VAT
Posted 2019 by Chris Davies

The Treasury have been concerned for some time about the loss of VAT to the Exchequer in the construction industry and in particular in relation to missing trader fraud. As a consequence a new set of VAT rules will apply from a now delayed start of 1 October 2020 to those working in the construction industry.

A new system of accounting will apply to standard rated and reduced rated construction services, including building materials supplied with those construction services, made on a Business to Business basis where the recipient makes an onward supply of those services. This is called the “reverse charge”.

So we can immediately see that the changes will not apply to zero rated supplies, supplies to Business to Consumers or supplies to end users even if they are businesses,

Where the reverse charge rules do apply the subcontractor will issue an invoice in the usual way but will not include VAT in the total. It will include a statement that the supplies are subject to the reverse charge. The recipient of the services will need to include the value of the VAT either at the standard or reduced rate, as appropriate in the value of his outputs in box 1 and inputs box 4 of the VAT return (subject to the usual VAT recovery rules). In most cases no net tax will be payable to HMRC on the transaction.

There are a few important administrative matters to note:

  • Going forward contractors will need to inform subcontractors if they are at the end of the supply chain. If no notice is given then the supplier should issue a reverse charge notice.
  • For those close to the VAT registration threshold it is worth noting that unlike the normal reverse charge for services purchased from outside the UK, the value of supplies received under the reverse charge for construction services does not count towards the VAT registration threshold
  • There could be significant cashflow advantages or disadvantages for affected businesses as a result of these changes and businesses will need to ensure that they fully understand the implications for their business.
  • The reverse charge mechanism cannot be dealt with through the cash accounting scheme.
  • Affected businesses should check that their software will cope with the reverse charge accounting and reporting requirements
  • The rules will take some while to be fully understood and sensibly HMRC have said that there will be a light touch for penalties for the first 6 months.

This is a specialist area and this article is intended to be a very brief insight into the very detailed new rules. Consequently, we can accept no responsibility for any loss arising as a result of action taken or refrained as a result of the contents of this article. Professional advice appropriate to your individual circumstances should always be sought and we would be very happy to discuss this with you. Please either use our website Contact Us form or speak to your normal point of contact within the firm.