Construction industry VAT changes from 1 October 2019 to increase administration burden and hit subcontractor cashflow

September 5th, 2019     Business news

From 1 October 2019 the VAT Domestic Reverse Charge for the Construction Industry will be introduced, this is the biggest change in the treatment of VAT in the construction industry in a generation.

Why is it being introduced?

It’s being introduced to combat VAT lost as a result of ‘missing trader’ fraud. In this type of fraud the supplier disappears along with the output tax collected.

Who will it affect?

It will apply to VAT registered businesses where payments between subcontractors and contractors are required to be reported through the Construction Industry Scheme. The reverse charge is not applied when the payment is made to an end user, or if a subcontractor is connected to a contractor that is an end user.
An end user is someone who uses the construction services for themselves not making supplies of construction services as part of their construction business.

What’s going to happen?

From 1 October when a supplier (subcontractor) invoices a user (contractor) for services within the scope of the reverse charge, VAT will no longer be charged or accounted for. The supplier will issue a reverse charge invoice to the customer, without VAT, but including appropriate wording stating it’s a reverse charge invoice.
The customer receiving the invoice will apply a reverse charge, when preparing their VAT return the output (sales VAT) will be added at the appropriate rate and a corresponding claim for input VAT (VAT on purchase) will be made (if it is allowable). The customer will not be paying any VAT to the supplier.

Is there going to be extra administration?

Yes there will be, including the need to produce appropriately worded reverse charge invoices and the need to keep proof of the customers VAT registered status and whether or not they are end users.

Cashflow, what’s the impact?

For some businesses, particularly subcontractors operating the new rules, there may be significant cash flow considerations. A subcontractor business may not in future be charging or collecting VAT where it previously has. Some subcontractors have come to rely on the VAT collected to help with cashflow. It’s important to do an assessment of a businesses’ finances to see what the impact of this will be. A VAT registered subcontractor with a turnover of £1m impacted by the changes, could lose on average £40,000 of cashflow.

Is there a need to change VAT schemes?

Some VAT schemes like the Flat Rate VAT scheme will work against those who use it and they should consider changing. To help cashflow, a move to monthly VAT returns may be appropriate.

What if a business has problems implementing the new rules?

HMRC will apply a light touch in dealing with errors related to operation of the Domestic Reverse Charge in the first six months, provided businesses can demonstrate they have tried to comply with the rules.

How can affected businesses prepare?

With less than two months to go businesses that come within the new rules need to consider these key areas:

• Understand the rules – read the HMRC guidance

• Accounting/invoicing software – will it be able to handle new style invoices and VAT return requirements?

• Cashflow – consider what the impact will be and look for solutions if necessary

• Staff training – to deal with the new rules

• Contact suppliers and customers now to make sure that everyone in the chain will be ready for 1 October. Businesses don’t want to be faced with correcting suppliers’ errors

• Ensure all the information is available to issue the right type of invoice to customers

• Set up ongoing systems to ensure that sale and purchase VAT are correctly treated

• Check that VAT schemes being operated are appropriate

As you would expect this briefing is only able to touch on some of the issues involved and appropriate professional advice should be taken relevant to your circumstances before taking or refraining from action.

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