Update: delayed until October 2020 to allow businesses more time to prepare and to avoid the changes coinciding with Brexit.
From 1 October 2020 the way in which certain businesses which operate in the construction industry shall account for VAT is changing. Generally, the customer shall be responsible for accounting for VAT due rather than the supplier.
HMRC is introducing a domestic reverse charge for VAT to the building and construction industry. The purpose of the measure is to combat VAT fraud where businesses in the supply chain charge customers VAT and fail to remit this VAT to HMRC.
Where the reverse charge mechanism applies, a business supplying ‘specified services’ to a VAT registered customer, will no longer charge VAT from 1 October 2020. Instead the requirement to account for VAT shifts to the customer, who will account for VAT to HMRC via its VAT return.
HMRC has confirmed that there will be no transitional period in relation to these new measures and businesses are required to apply the new rules immediately from 1 October 2020.
In what circumstances does the reverse charge apply?
The reverse charge applies to ‘specified services’ (broadly those which are construction operations for the purposes of the Construction Industry Scheme (CIS)) supplied to VAT registered businesses which are also registered under CIS. The reverse charge applies to both standard-rated and reduced-rated supplies (it does not apply to zero-rated supplies). The reverse charge does not apply where the customer is an ‘end-user’ (generally where the customer will not be making an onward supply of the services) or someone connected to one. Where the customer is an end user or someone connected to one VAT shall be chargeable by the supplier at the applicable rate.
HMRC’s guidance on the new rules (https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services) also includes lists of services which are, and are not subject to the reverse charge.
Some contracts may have a reverse charge and non-reverse charge component. In such circumstances, the entire supply will still be subject to the reverse charge.
What do businesses need to do?
Businesses working in the construction industry should consider how the introduction of the reverse charge will impact upon their VAT compliance, depending on whether they are a contractor or subcontractor in a particular contract.
Businesses should ensure that their software can process the reverse charge, and that their staff are familiar with the changes that are taking place and how they will apply to both sales and purchases, as applicable.
Both contractors and subcontractors will need to consider whether the reverse charge applies to supplies that they make. This will involve confirming whether the customer is an end user or someone connected to one; whether the customer is VAT and CIS registered; and whether their services are those that are subject to the reverse charge.
Contractors must also establish whether the reverse charge applies to their purchases of services; if subcontractors incorrectly charge VAT to them on a supply, the contractor is not entitled to recover this VAT in its VAT return.
For those businesses whose services will be subject to the reverse charge from 1 October 2020, there may be a negative cash flow impact where VAT collected on supplies will no longer be available as working capital.
When supplying a service subject to the reverse charge, suppliers must include all the information that is typically included on a standard VAT invoice but must not charge VAT.
Suppliers must also include a statement on the invoice referring to the reverse charge and the amount of VAT to be accounted for under the reverse charge, such as:
“Reverse charge: customer to pay output VAT of £(insert VAT amount) to HMRC.”
If the VAT amount can not be included in the statement, the applicable VAT rate must be included.
HMRC will assess for VAT on errors in accounting for the new reverse charge. However, HMRC has stated they will apply a ‘light touch’ for errors arising in the first six months of the new measures where taxpayers try to comply with the legislation and act in good faith.
Businesses should carefully consider what processes they may wish to put in place to ensure the correct VAT treatment is applied and evidence is held to support a decision to apply the reverse charge or to charge VAT.
GMcG provides VAT consultancy services to the construction sector and has experience in assisting businesses with changes in VAT compliance legislation. To discuss any aspect of the new reverse charge, please do not hesitate to contact any of the following:
GMcG Belfast - Eddie Broomfield
GMcG Lisburn - Christine Harrison
GMcG Portadown - Neil Armstrong