Are you ready for the new construction industry VAT rules?

Stuart Crook FCA on what changes to construction VAT will mean for businesses in the industry and recent announcements made by HMRC.

There are several changes happening in the business world, and that includes the construction industry with HMRC's announcement of a new domestic reverse charge ('DRC') rule.

The combination of this, along with the learning curve that is affecting several businesses in the industry from the enforcement of Making Tax Digital, has meant a hectic administrative time for construction businesses. It's important to remember that the best way to prepare for the new DRC rules is to be informed, know your responsibilities and contact your business advisor to clarify any concerns, as well as to set a plan in place. 

Worried about how your construction business will be affected by DRC? Call Wellers today!

Whenever there is a change, one of the first questions asked is, why? Like many recent changes announced from historical Budgets and by HMRC, anti-fraud is the key factor. The implementation of the 'DRC' legislation has been seen as a way to prevent missing trader fraud in the construction sector.

In its simplest terms, the introduction of the ‘reverse charge’ means that the customer rather than the supplier will be liable to account for any VAT due on certain building services directly to HMRC.

These changes may prove quite the hurdle for VAT-registered businesses, as well as charities or voluntary based organisations delivering construction services.

The VAT Advice Line outlined the pending changes and noted that there will be a significant adjustment for both suppliers and customers, this includes:

Subcontractors

• Cash flow will be a dominating issue for subcontractors where they will no longer be charging VAT due to the DRC.
• HMRC will require VAT payment before the VAT you collect from your customers can be used.

Contractors

• Will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge.
• Ensure you’re charging the correct amount of VAT dependent on the work performed       (20% | 5% | 0%).
• If you are the ‘end user’, you must inform the supplier to ensure you charge the correct rate of VAT if required.

‘End user’

• The HMRC guidance states that “it will be up to the end user to make the supplier aware that they are an end user and that VAT should be charged in the normal way instead of being reverse charged. This should be in a written form that is clearly understood and can be retained for future reference.”
• Where there is a reverse charge element in a mix of supplies, the entire supply will be subject to DRC.

Undoubtedly, the introduction of the reverse charge will necessitate the need for businesses to modify their accounting systems, as well as take into account how their cash flow may be affected. Remember that your accounting systems need to be reverse charge and MTD compliant.

Key points:

• With effect from 1 March 2021 (amended date), the customer rather than the supplier will be responsible for accounting for VAT due on certain building services when they are reported at the standard or reduced rates of VAT and are required to be reported through the Construction Industry Scheme regulation.
• The DRC will apply to service supplied to a contractor who is not an 'end user'. However, there may be instances when this rule may be relaxed where both parties agree. Please refer to further HMRC guidance on this matter.
• It will cover more than construction services.
• The DRC will not count towards the VAT registration limit.
• You can find out when you must use the VAT reverse charge here.

HMRC will release additional information on this in the coming months; however, should you have questions or concerns we recommend speaking to your professional business advisor.

When will this be happening?

HMRC originally set a date of 1^st October 2019 for a major change to take affect with the introduction of the new domestic reverse charge ('DRC') rule; however, we have seen several amended dates with HMRC finally announcing 1 March 2021 as the new start date for these changes.

It's not a shocking push back announcement as many businesses effected by the impending change argued that the awareness and timeframe given left them unprepared to implement the necessary requirements to remain compliant, which HMRC agreed. You also find more information on the changes on GOV.UK

Do not take this newly announced start date as an opportunity to set preparations aside and potentially forget about your soon-to-be obligations.