A new VAT domestic reverse charge regime for the construction industry will come into force from 1 October 2019, which will significantly affect the VAT affairs and tax liabilities of companies both inside and outside of construction industry.
What is the VAT domestic reverse charge?
The domestic reverse charge will apply to all business-to-business supplies of services between VAT-registered businesses, where recipients make onward supplies of the same services within the construction industry.
Introduced by HM Revenue & Customs, it is intended to prevent missing trader fraud, where a company effectively ceases trading before tax is due.
Where a reverse charge element exists within the supply chain then the whole supply chain will be subject to the domestic reverse charge, but can also cover subsequent supplies where the domestic reverse charge has applied if parties are in agreement.
The new charge will not apply where:
- Services are supplied to the end user, such as the property owner;
- The main contractor sells a newly completed building to the customer;
- The recipient makes onward supplies of those construction services to a connected company;
- The supplier and recipient are landlord and tenant or vice versa; or
- The supplies are zero-rated.
Time to prepare
Subcontractors in the same supply chain will have to be VAT-registered under the new rules, even where they do not meet the VAT registration threshold, and they will have to issue a VAT invoice highlighting which supplies are subject to a reverse charge.
This is an onerous change to the rules that is likely to affect a large number of construction workers who have previously not found themselves subject to the VAT regime.
As these individuals will not charge VAT on their subcontract services under the new system, they will no longer be able to use the VAT they collect from customers as working capital before it is paid to HM Revenue & Customs, which could significantly affect cashflow.
Ensuring that VAT is not paid to a subcontractor under the reverse charging falls upon the main contractor, who should be able to recover the VAT instead.
Contractors will need to clearly identify whether they are dealing with a customer as the reverse charge only applies between businesses in the construction supply chain and they must, therefore, charge VAT to the end customer.
As the changes under the VAT domestic reverse charge are wide-ranging and particularly complex it is important that construction firms start planning immediately.
In most instances, it may make sense to outsource much of this work to a VAT specialist to reduce the chance of error and to lessen the stress on a business.
At MJ Bushell we can help you prepare for the changes ahead by providing training and assisting with the management of your VAT reporting. We work with a number of businesses in the construction set and appreciate how demanding the industry can be, so speak to us and let us remove the stress of the VAT reverse charge.