HMRC are planning to force building contractors to charge themselves VAT under new proposals due to be implemented in October 2019.
Draft legislation is out for comment which will attempt to mirror the CIS tax scheme, but for VAT. Here we explain what's proposed, and what the so-called "Reverse Charge" (RC) for construction services will mean.
Under the new rules, due to be published in final form in October 2018, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the RC 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) accounts 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.
The RC only applies to other construction businesses which then use them to make a further supply of building services, and not to end users eg private individuals, retailers, and landlords. There are no minimum limits, but the RC will not apply to associated businesses.
Type of work affected
Despite the rather misleading reference to ’construction‘ the RC will, in fact, apply much more widely to services in the building trade, including but not limited to, construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, foundation works. The definitions in the draft legislation have been lifted directly from the CIS legislation.
Excluded works include:
- professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
- drilling for, or extraction of, oil, natural gas or minerals, and tunnelling or boring, or construction of underground works for this purpose
- manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
- manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
- signwriting and erecting, installing and repairing signboards and advertisements the installation of seating, blinds and shutters or the installation of security.
The scheme is still out for consultation, and one of the main concerns emerging is the burden for traders of identifying customers who are liable for the RC – ie checking VAT registration numbers and obtaining evidence that a customer is an ’end user‘ or not, so that VAT, if due, is invoiced correctly. It seems likely that certification will be required, but none of this is covered in the consultation. There are also questions over the scope of the services covered, and how the supply of ‘white goods’ (where VAT deduction is blocked in most cases), will be dealt with under the RC mechanism.
The idea of having draft legislation and guidance by October 2018 is to allow businesses 12 months in which to make the necessary changes to systems, prior to implementation on 1 October 2019. This is a period in which businesses will also be coping with or preparing for Brexit and Making Tax Digital. Traders used to including VAT in their cash flow projections will also need to adjust.
Affected businesses will need plans in place to ensure that as suppliers they do not charge VAT incorrectly, or as recipients, they apply the RC correctly. Output VAT wrongly applied on an invoice can be collected by HMRC, but will not be recoverable by the recipient, and failure to operate the RC could lead to error penalties.
Wondering how it might affect you? Get in touch.