So probably the first question that comes to mind when you initially hear reverse charge VAT – what is it? The domestic charge for building and construction services is seen to be an amendment on how VAT is handled for different types of construction services throughout the UK.
Essentially, it is an extension of the Construction Industry Scheme (CIS) and is applied to those who have transactions between VAT registered contractors and sub-contractors registered for CIS. Therefore, those supplying construction services to a VAT registered customer will no longer have to be accountable for the VAT, instead this responsibility will lie with the customer. For services provided, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC.
When is this being introduced?
The initial proposed date was meant to be for 1st of October 2019, however, this provisional date has been postponed until October 1st, 2020 due to industry concern that some businesses in the construction sector were not ready for this implementation data.
So those working in the UK construction industry will have to adapt to the new domestic reverse charge VAT set by HMRC. This announcement requires the recipient rather than the supplier to account for the VAT due on certain construction services.
Over the course of the next year, HMRC aim to work closely with the construction sector to help raise awareness and provide guidance and support to make sure all businesses will be ready for this come October 1st, 2020.
Why is this being introduced?
One of the main reasons HMRC are introducing this is to combat fraud, whereby construction businesses charge VAT for services they supply but then disappear without paying their VAT bill – taking an 5-20% additional profit that doesn’t below them them. Thus, the construction industry has been targeted due to organised criminals that act this way.
By moving the VAT charge down the supply chain, HMRC intend to make this type of fraud impossible. The introduction follows the success of similar, although not identical, verse charge schemes for the likes of mobile phones, computer chip retailers and wholesale energy suppliers.
Who does this regime apply to?
The domestic reverse charge VAT applies only to a VAT registered business who are registered with CIS and use CIS to report payments. Thus, this applies to services supplied between most construction sub-contractors and contractors in the UK.
If your CIS business is the recipient of construction services, and received an invoice with the reverse charge applied, then you account the VAT amount as part of your overall input tax, as if you’re charged it yourself.
If you are not a VAT -registered business then this regime should not apply to you, however, standard VAT rules will apply with the supplier.
Reverse charge VAT also does not apply to end users or those connected to end users such as landlords and tenants.
The HMRC say that reverse charge VAT will not apply to sub-contractors unless the answer to the following questions are positive:
Are any supplies you are making with the cope of CIS?
Is the supply standard or reduced-rated?
IS your customer VAT-registered?
Will your payment be reported under CIS?
Are you sure the customer is not an end user?
Impact on Construction Businesses
Construction businesses have to ensure that their accounting systems are capable of processing reverse charge supplies and make ongoing checks to ensure that supplies and purchases are correctly treated. As the VAT amount must still be shown on invoices subject to the domestic reverse charge, the risk that suppliers will account for the VAT to HMRC in error and customers will recover it from HMRC is clear.
Sub-contractors who rely on VAT collected from their customers to use as working capital until they have to remit it to HMRC are likely to suffer from the loss of cash flow. These businesses and even their customers will need to consider if payment terms need to be revisited to avoid problems in the supply chain.
Sub-contractors will also need to confirm that they are working for a VAT registered business and whether they are working for an end user, or for someone connected to an end user, including landlords and tenants.
Summary
Although this doesn’t officially begin until October 1st 2020, it is possible that the VAT reverse charge for construction services might have already affected projects of your business if they began and end after this date – then reverse charge invoicing will apply.
Thus, although you still have several months, it is important to attempt to become familiar with what is and isn’t included in the reverse charge VAT. In addition, communication with any regular contractors is also necessary to ensure they understand requirements.
For further information or advice regarding VAT reverse charge, you can either consult a VAT specialist or speak directly with the HMRC to clear up any queries you may have.