POSTPONEMENT OF CONSTRUCTION & BUILDING SERVICES REVERSE CHARGE VAT

IMPORTANT NEWS FOR CONSTRUCTION AND BUILDING SERVICES

(It’s full name: “The Domestic Reverse Charge VAT for Construction and Building Services”), was to come into effect on 1 October 2019, but with less than three weeks before the changes were due to take place, this has now been delayed by HMRC for twelve months!
 

The motivation behind the delay was to help around 150,000 businesses prepare, and avoid the measure clashing with the UK’s departure from the EU. 

Many businesses will be relieved at the postponement.  Businesses operating in the construction services industry need to be prepared.  Suppliers and customers need to understand whether or not VAT should be charged and how to apply these changes.  Postponing the changes will allow businesses to fully understand the requirements and make correct preparations to implement the reverse charge method from 1 October 2020. 

The details have not changed … The customer receiving the service will have to pay the VAT due to HMRC instead of the supplier.  It will only apply to individuals or businesses registered for VAT in the UK.  It will affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS). 

Services affected by the domestic rate charge 

The reverse charge will affect supplies of building and construction services supplied at the standard or reduced rates that also need to be reported under CIS.  These are called specified services. 

There is an important difference between CIS and the reverse charge where materials are included within a service.  The reverse charge applies to the whole service, whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content. 

The reverse charge does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK. 

The reverse charge does not apply to some services.  These are those supplied to end users or intermediaries connected with end users.  To check out services affected visit: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services 

Steps to take over the next 12 months 

  • Check whether the reverse charge affects either your sales, purchases or both.  Review any supplies provided to and received from other VAT registered contractors to what is likely to be liable to the reverse charge.
  • Where possible, obtain details of any customer’s VAT registration status, CIS status, and confirmation they are the end user.
  • Make sure your accounting systems and software are updated and capable of dealing with the reverse charge, including dealing with suppliers’ invoicing needs.
  • Consider whether the change will have an impact on your cash flow.  Preparing long term cash flow projections in case VAT is collected by error or paid to HMRC, should also be on the agenda, as well as plans to mitigate this.
  • Make sure all of your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate. 

If you’re a contractor: You’ll also need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts.  You’ll need to notify your suppliers if it will. 

If you’re a sub-contractor: You’ll also need to contact your customers to get consideration from them if the reverse charge will apply, including confirmation if the customer is an end user or intermediary supplier.  

Monthly returns:  As a result of the reverse charge, some businesses may find that, because they no longer pay the VAT on some of their sales to HMRC, they become repayment traders (their VAT Return is a net claim from HMRC instead of a net payment).  Repayment traders can apply to move to monthly returns to speed up payments due from HMRC.  The best time to move to monthly returns will depend on the business and whether they want to have monthly returns from October, or to delay a little to offset some of the VAT they owe to HMRC on periods spanning 1 October. 

HMRC is expected to up its game regarding communicating these changes, and we will continue to keep you informed of the changes leading up to 1 October 2020. 

If you have any questions regarding the Domestic Reverse VAT Charge for Building and Construction Services, please don’t hesitate to contact Paul Buckley, our Senior Tax Manager (paul.buckley@waltonscw.co.uk) or alternatively speak to a member of Paul’s team. 

Further information can also be found at HMRC’s website: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services