New reverse charge VAT rules for the building trade
Jul 06, 2018
Under new rules due to come in on 1 October 2019, builders, sub-contractors and other trades associated with the construction industry will have to get their heads around a new method of accounting for VAT – dubbed the ‘reverse charge’.
The measure is designed to combat VAT fraud in the construction sector labour supply chain, which HMRC claims represents a significant tax loss for the Treasury.
HMRC first launched a consultation on these new rules in March 2017, and has now published draft legislation to introduce the reverse charge for construction services. Comments have to be registered by 20 July 2018, and then the final legislation will be published this October.
Under the proposed new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will no longer be invoiced in the normal way. Under the reverse charge a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) would then account for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position. This is intended to ensure that VAT is correctly accounted for on supplies by sub-contractors.
Construction work affected by the reverse charge
The reverse charge will only apply when liaising with other construction businesses which then make an onward supply of building services. It won’t apply to end-users/customers, such as private individuals, landlords and retailers.
The new rules will have quite wide ramifications, as they will extend beyond the main construction trade to include demolition, repairs, drainage, painting and decorating, scaffolding, civil engineering works, foundation works, alterations, excavations and the installation of heat, light, water and power systems. These categories have been lifted directly from the CIS legislation.
Conversely, some other professions connected with the construction trade will not be affected by the new rules. Professional services provided by architects, surveyors and consultants in building, engineering, interior or exterior decoration or in landscaping are all excluded. The draft legislation sets out a full list of other work to which the reverse charge does not apply.
Preparing for the new reverse charge rules
Concerns have been raised at how time consuming it may be for traders to obtain evidence that a customer is an ‘end user’. They will need to think about how to confirm and record when and where the reverse charge rules apply, and also how they will show this on invoices and VAT returns.
It is hoped that the legislation and guidance will be finalised by October 2018 to allow businesses at least 12 months in which to make the necessary changes to their systems before the rules are implemented on 1 October 2019. Bearing in mind that businesses will also dealing with Brexit plus the introduction of Making Tax Digital, this could prove a very challenging time requiring a lot of adjustments.
Please contact us if you are likely to be affected by these changes and we can work with you to ensure you are ready for the new system.