Stuart Crook ACA goes over the latest changes to construction VAT and what it will mean for businesses in the industry.
There are several changes happening in the business world, and that includes the construction industry. From the 1st October 2019, a major change will be taking affect with the introduction of the new domestic reverse charge ('DRC') rule.
The combination of this, along with the learning curve that will be affecting several businesses in the industry from the enforcement of Making Tax Digital will mean a hectic administrative time for construction businesses. 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.
Whenever there is a change, one of the first questions asked is, why? Like many recent changes announced this past year in the Budget 2018 and by HMRC, anti-fraud is a key factor. The implementation of the 'DRC' legislation has been seen as a way to guard against missing trader fraud in the construction sector.
In its simplest terms, the introduction of the ‘reverse charge’ means that the customer rather then 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 outlines the pending changes and notes that there will be a significant adjustment for both suppliers and customers, this includes:
Cash flow will be a dominating issue for subcontractors where they will no longer be charging VAT do to the DRC.
HMRC will require VAT payment before the VAT you collect from your customers can be used.
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.
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.
The content of this post is up to date and relevant as at 13/02/2019.
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