Reverse Charge VAT for building and construction services
You may have already heard that, from October 1st of this year, the government will be changing the way it collects VAT from businesses in the construction industry with the introduction of a domestic reverse charge. The rationale behind the scheme, which already applies in some other industries, such as mobile phones and gas & electricity, is to eliminate what is known as “missing trader fraud”. In brief, this is where VAT charged by the supplier is ultimately not paid over to HMRC but retained by that same supplier.
The domestic reverse charge will apply to certain supplies of standard-rated or reduced-rate construction services (‘specified services’) where payments are required to be reported through CIS. Zero-rated supplies are not included. Examples of these supplies include groundworks, structural alterations, repair of buildings and installation of heating and power systems. There will be some exclusions such as professional work by architects and surveyors and manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site.
Reverse charge VAT mechanism
The VAT reverse charge mechanism means that the customer will account to HMRC for the VAT in respect of these services rather than the supplier. This will apply through the supply chain, again where payments are required to be reported through CIS. When it reaches the ‘end user’ (i.e. where a customer receiving the supply is no longer a business that supplies these services), then VAT is charged as normal.
From 1st October, a VAT registered business receiving a supply of specified services from another VAT registered business will account for the VAT through the VAT return instead of paying it to the supplier. It will be able to reclaim that VAT subject to the normal rules. The supplier will then need to issue a VAT invoice that indicates the supplies are subject to the VAT reverse charge.
Ultimately, the government estimates that up to 150,000 businesses could be affected by these changes and some industry experts anticipate that there will be a significant cashflow impact on many small businesses, particularly those who rely on VAT collected as working capital before handing it over to HMRC – not to mention the potential costs of implementing new accounting systems and software.
Plenty, then, for many small and medium-sized businesses to think about between now and 1st October. However, it is worth noting that the legislation remains in draft form at present and amendments prior to implementation may be likely.
Contact us for more information about the changes and what they might mean to you and your business.