*On 1st October 2019 HMRC’s new VAT domestic reverse charge for construction services was due to come into force, as part of ongoing moves to cut VAT fraud. The new rules require the contractor receiving services and not the sub-contractor who supplied the services to account for the Output VAT due on specific building and construction services. This change means that construction businesses will need to know whether the reverse charge applies. They’ll also need to ensure their accounting processes and IT systems can handle the reverse charge. It’s also recommended that businesses estimate and plan for any impact on cash flow if they are no longer holding Output VAT.
The charge affects only supplies at standard or reduced rates where payments are required to be reported via the Construction Industry Scheme (CIS). It does not apply to zero-rated supplies or to services supplied to ‘end users’ or ‘intermediary suppliers’.
Further details are provided here, and the team at HB Accountants are on hand to answer and queries you might have.
What happens from 1st October?
A VAT-registered business (sub-contractor or supplier) that provides specific construction services to another VAT-registered business for onward sale, must issue a VAT invoice stating that the service is subject to the domestic reverse charge. Their invoices won’t charge VAT but instead show what VAT is due or at least show the VAT rate. This means that they’ll no longer receive VAT payments on these services.
Then the contractor receiving these specified services must account for the Output VAT due on that supply through its VAT return, rather than paying the VAT to the supplier. The contractor can also reclaim the VAT due on supplies received as Input VAT, subject to normal VAT rules, meaning no net tax is usually payable to HMRC.
Specified services where the reverse charge applies
In general terms, the domestic reverse charge applies to services supplied at standard or reduced rates in the category of Construction Operations for CIS reporting, with these two provisos:
- The reverse charge includes goods, where supplied with specified services. This is different from the CIS scheme, where CIS payments to sub-contractors who are subject to income tax deductions, are apportioned to exclude the materials content.
- Services excluded from the definition of construction operations for CIS are similarly excluded from the VAT reverse charge, where these are supplied on their own. But where such services are supplied with services subject to the reverse charge, the whole supply is subject to the reverse charge, as is the case for the CIS scheme.
In some situations it can be difficult to determine whether the reverse charge applies, in which case, if there has already been a reverse charge supply on a construction site, any subsequent supplies on that site between the same parties can be treated as reverse charge supplies, if both parties agree. If in doubt HMRC recommends reverse charging, if the recipient is VAT-registered and payments are subject to the CIS.
Services not included in the reverse charge
The domestic reverse charge for VAT applies to specified services except when:
- The supplies are zero-rated.
- The recipient is not registered for the CIS.
- The recipient is not VAT registered or required to be VAT registered.
- The recipient is an ‘end user’ that doesn’t sell-on the services such as a property owner that has premises built for its own use.
- The recipient is an ‘intermediary supplier’ connected to the end user, such as landlords and tenants or construction services recharges within a group of companies.
Key actions to prepare for reverse charging
- Review supplies received from and made to other VAT registered contractors and sub-contractors to determine whether the reverse charge will apply from 1st October 2019.
- Assess the likely impact on cash flow if you no longer hold Output Tax and look at ways to minimise potential issues. Moving to monthly VAT returns from a quarterly cycle could speed up payments from HMRC and ease cash flow.
- Ensure your processes provide you with information as to whether suppliers are VAT registered, supplies are within the CIS and ‘specified services’ definition and to get notification from customers to show if they are an end user or linked to an end user.
- Check that your accounting systems can calculate and report on reverse charge supplies and that invoices can show where reverse charges apply. Implement IT changes as required.
- Provide training and guidance so that your team fully understand the new processes.
- If you are a supplier using the Cash Accounting Scheme or the Flat Rate Scheme, neither of these schemes can be used for the supply of services that are subject to the reverse charge. In this situation you may not want to use these schemes going forward.
For a business whose customers are usually end users a practical approach could be to include a statement in your business terms and conditions to the effect that it is assumed that the customer is an end user, unless they indicate otherwise.
Guidance from HMRC
HMRC has provided technical guidance on the scope of these rules –
‘VAT: domestic reverse charge for building and construction services’
Support to make the change
In implementing the reverse charge, and with a renewed HMRC focus on tax compliance in construction, past discrepancies in the classification of building and construction services may come to light. We’d suggest that a full review your VAT and CIS compliance is now a sensible course of action.
Please get in touch to discuss this new requirement and the impact it may have on your business. Ask us for advice on cash flow, accounts management and the financial actions you can take to mitigate any adverse impact and take control under these new rules.
You can reach our team on 01992 444466 or email firstname.lastname@example.org