Construction services VAT reverse charge

Many in the construction industry were unaware of the significant change, which was due to take place on 1 October 2019, relating to how VAT is charged in the construction industry. The good news for them is that the implementation of the change has been postponed until 1 October 2020. Although this is a welcome relief to many, it should not be forgotten about and businesses should be aware of the proposed change.

Why is the reverse charge being introduced?

The domestic reverse charge (referred to as the reverse charge) is a substantial change in the way VAT is collected in the building and construction industries. The change is intended to prevent the perceived fraud, where it is believed that suppliers are receiving VAT from customers and then not paying their VAT bill.

How does the reverse charge work?

Under the reverse charge scheme the responsibility for the reporting of a VAT transaction shifts from the seller to the buyer of goods or services. The customer receiving the goods and services will have to pay VAT to HMRC instead of the supplier. By moving the VAT charge along the supply chain, HMRC is hoping to make this type of fraud impossible.

Which supplies does it affect?

It relates to all building and construction goods and services that are supplied at the standard or reduced VAT rates and are covered by the CIS Scheme, including: -

• constructing, altering, repairing, extending, demolishing or dismantling buildings or structures
• installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
• painting or decorating the inside or the external surfaces of any building or structure, and
• services which form an integral part of, or are part of the preparation or completion of the services described above - including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works

What will the impact of the reverse charge be?

The implementation of the reverse charge will, of course, have an administrative impact along with compliance and cash flow issues. Businesses need to make sure that they have accounts systems and processes to handle reverse charge invoices and that their IT and staff are up to date to cope with the changes.

How to get ready for the reverse charge?

• Check if the change affects your sales, purchasing or both
• Make sure your accounting systems and software are up to date and able to deal with the change
• Consider the effect of the change on your cashflow position
• Review contracts to see whether the reverse charge applies to the services you receive, if so, notify suppliers to put appropriate measures in place
• Sub-contractors should contact customers to see if the reverse charge applies and confirm whether the customer is the end user or intermediary supplier.

Businesses within the industry should make sure that they are ready for the introduction of the reverse charge on 1 October 2020. If you are unsure what is needed, then you should obtain full advice from your accountant or a VAT expert.