Changes in the Construction Industry: VAT Reverse Charge

Do you currently supply or receive services that are reported under construction industry scheme? If so, from 1st October 2020 the way VAT is collected in the building and construction industry is majorly changing. Initially, the domestic reverse charge for construction services was set to begin on 1st October 2019, however the government announced it would be delaying this introduction for 12 months due to the increasing concerns that many construction sector businesses will not be ready to implement the changes with the original launch date for later this year.

From this date, the main contactor will be liable to account for VAT to HMRC in respect of purchases rather than the sub-contractor. This means VAT cash will no longer flow between businesses.

This will affect many sub-contractors, but it does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK. There are also several exemptions to the reverse charge rules including: architects, surveyors, interior and exterior decoration, landscape consultants and security system installation engineers.

The VAT liability does not change with the implementation of a reverse charge; however, it does change the way that VAT is accounted for. Under the reverse charge, a VAT registered business (sub-contractor) that supplies certain construction or building services to another VAT registered business (main contractor) for onward sale will be required to issue an invoice stating that the service is subject to the domestic reverse charge. The VAT registered main contractor will then need to account for VAT due on supply to the end customer via its VAT Return.

For many construction businesses, the change is likely to have extensive consequences. New procedures will need to be in place to ensure VAT accounting systems are compliant with the new requirements of the reverse charge. The rules require a range of verification checks, to ascertain VAT status of customers, CIS registration (in some circumstances), and end user or intermediary supplier status.

Due to the reverse charge changes, some businesses may find they are no longer paying VAT on their sales and are in a repayment position. These businesses may want to take advantage of this positive cash flow position to change to monthly VAT returns to accelerate payments due from HMRC. VAT scheme users should also note that the Flat Rate Scheme may no longer be of benefit, and that reverse charge transactions cannot be dealt with through the Cash Accounting Scheme.

On introduction to this new scheme, HMRC have stated they will operate a “light touch” penalty system for individuals and business who are trying to comply with the new legislation and have acted in good faith in the first six months of operation. This is to allow for initial implementation issues over interpretation of the new rules.

Overall, the change means that the construction sector is likely to be subject to considerable HMRC scrutiny in the foreseeable future. For this reason, we would recommend taking great care in complying with all HMRC changes surrounding CIS and VAT.

Alison Moore