VAT – Reverse charge for the construction sector
Posted on 5th March 2019
Do you work in Construction? Does your purchases fall under the supplies for the CIS Scheme? From 1 October 2019 you may have to account for your suppliers VAT!
HMRC are bringing in a reverse VAT Charge for Construction which means the customer rather than the supplier will have to account for VAT due on certain building services when they are reported under CIS regulations. Essentially, HMRC will require building contractors to charge themselves VAT, but new VAT rules will also affect other trades associated with the building industry.
So how will it work – The technical answer
Under the reverse charge (RC) a VAT-registered business that supplies certain construction or building services to another VAT-registered business for onward sale is required to issue an invoice stating that the service is subject to the domestic reverse charge. The recipient/customer, if it is VAT registered, must then account for the VAT due on that supply via its VAT return at the appropriate rate, instead of paying the VAT to the supplier. The recipient may recover that VAT amount as input tax, subject to the normal rules – this would normally mean a nil net tax position with no VAT being due to HMRC.
How will it work – The simple answer
If you pay for building services under CIS and that supplier is VAT registered then you will pay them only the Net amount. The VAT that you would have paid the supplier is included on your VAT return as due to HMRC. You still include the VAT reclaim on your inputs as normal. Meaning more paper work but no change to you for the VAT paid.
Why bother then?
HMRC are trying to stop what is known as “missing trader” VAT fraud. This is where you pay a supplier for services including VAT. HMRC then pay you that money back as normal via your VAT return. However, the supplier goes “missing” and never pays the VAT to HMRC so they are out of pocket.
The legislation update confirms that the value of reverse charge services received will not count towards the VAT registration threshold for the customer, which is good news for smaller businesses. It also confirms that if there has already been a domestic reverse charge supply on a construction site, any subsequent supplies on that site between the same parties can be treated as domestic reverse charge supplies if both parties agree.
The reverse charge will not apply if:
the supplies concerned are zero-rated – such as the construction of housing;
services are supplied to an ‘end user’ such as a property owner, or directly to a main contractor that sells a newly completed building to a customer;
the recipient makes onward supplies of those construction services to a connected company; or
the supplier and recipient are landlord and tenant or vice versa.
The guidance issued by HMRC so far lacks detail. It is expected that this will be expanded with examples and further detail to be available in Spring 2019. However, it is still quite evident that this marks quite a fundamental change to how VAT is recorded and declared for companies who operate in the Construction sector. Changes to both software and processes will be required.
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