ARE YOU PREPARED FOR THE REVERSE CHARGE VAT COMING INTO EFFECT FOR THE BUILDING AND CONSTRUCTION INDUSTRY?
In 2018, HMRC announced it was going to take action against fraud within the construction sector, to prevent the exploitation and avoidance of VAT payments by sub-contractors and construction workers. The resulting legislation is known as Domestic Reverse Charge VAT for construction services, which will be effective from 1st October 2019.
WHAT IS THE REVERSE CHARGE? Designed to shift the responsibility to the final customer or ‘end user’, the reverse charge will apply throughout the supply chain to any B2B construction supplies. The new reverse process will see that suppliers no longer invoice for VAT, instead their invoice must show the following: ‘the service is subject to the domestic reverse charge’. The customer will account for the VAT through their own VAT return at the appropriate rate.
WHY IS THE REVERSE CHARGE BEING IMPLEMENTED? Between March and June 2017, HMRC conducted a consultation which found a prevalence of organised criminal activity, whereby contractors and sub-contractors we’re involved in ‘missing trader fraud’ by extending the supply chain. This new anti-fraud measure will aim to identify and expose specified services and liability of construction services.
WHAT ABOUT NON-OFFENDING SUBCONTRACTORS AND CONSTRUCTION WORKERS? This change is likely to impact around 150,000 businesses in the construction and building sector – even the honest businesses. As a result, all subcontractors, construction workers and small businesses within the sector will need to make major changes to the way they account for and report their VAT payments, and you’ll need to prepare and plan for the implementation of the reverse charge. The reverse charge will impact SME’s in terms of loss of cash flow where there is no VAT charged.
HOW CAN I MINIMISE THE IMPACT OF THE VAT CHANGES? • Find the evidence: You’ll need to start identifying which supplies to your customers or contractors are liable for the reverse charge. This will include checking VAT registration and providing evidence that the customer is the ‘end user’ and then invoicing correctly according to the new rules. • Allow additional time and costs: Small businesses are likely to see some financial impact, as they may be required to change or adjust their current accounting and IT systems, invest in training for staff members. • Manage your cashflow: For small businesses or companies who operate within a tight cashflow system, extra preparation and planning will be necessary to account for change in how VAT payments are dealt with.
The reverse charge does not apply to businesses that supply specified services to connected parties within a corporate group structure. In this instance, normal VAT accounting rules will be applicable. If you’re a business within the construction sector or working as a subcontractor, we can help you prepare for the implementation of the Reverse Charge. Please contact the LWA Tax team in Warrington on 01925 830 830 or call our South Manchester office on 0161 905 1801.