Changes to the way customers account for VAT on certain building and construction services will be introduced from 1 October 2019.
In a nutshell, the changes mean that a UK VAT registered customer in receipt of standard or reduced rate services that are normally reported through the Construction Industry Scheme (CIS) must account for VAT as a domestic reverse charge rather than the supplier account for VAT on its supply.
The domestic reverse charge is a mechanism whereby the customer accounts for VAT as though it made the supply and then is able to deduct the VAT as input tax – this will normally result in no net tax payable to HMRC by the customer.
The changes were first announced in the Autumn Budget 2017 and are in response to organised crime groups artificially extending supply chains within the construction industry sector with the intention of failing to pay VAT. It is thought that the reverse charge removes the scope to evade any VAT owing to HMRC.
Supplies to an end user will not be caught by the changes and VAT should be charged in the normal way. End users will usually be those customers who use the building or construction services for themselves rather than sell the services on as part of their business. Other excluded services that the reverse charge will not apply to are:
- Zero rated supplies of construction services
- Supplies where the recipient makes onward supplies of those construction services to a connected company; or
- Where the supplier and recipient are landlord and tenant or vice versa.
For the first six months following the introduction of the new reverse charge, HMRC have said they will apply a ‘light touch’ when in dealing with related errors.
Contractors working to main contractors will need to identify when they should not charge VAT. The changes could adversely affect the cash flow of those suppliers that reply on VAT collected in the short term.
More information will be provided in due course leading up to the change. You can prepare for the changes now;
- Check that your accounting package will deal with the domestic reverse charge
- Put procedures in place so you can identify supplies made to end users
- Update invoices to make clear that the domestic reverse charge applies and that the customer is required to account for the VAT