The way VAT is charged on construction services will change in October 2019. HMRC has introduced the Domestic Reverse Charge (DRC) as part of new anti-fraud rules to combat VAT fraud in construction sector labour supply chains.
If VAT is charged incorrectly by a sub-contractor, then HMRC may rule that it is not VAT that can be recovered by the contractor. This would create an actual VAT cost to the business. On top of this, penalties and interest charges could also be applied.
The new rules will be applied on 1st October 2019. Supplies between contractors and sub-contractors (as defined by CIS) will be subject to the DRC. If the contractor is an end user, the DRC will not apply.
End users are recipients who will use the building services supplied for themselves, rather than resell those on as part of an ongoing supply chain.
Reverse charge accounting is where the recipient of the services must self-account for VAT on the services received, rather than the supplying charging VAT on the services provided.
In a simple supply chain the position in regards to VAT is as follows:
From October 1st 2019 this will look like:
The Contractor treats the supply from the sub-contractor as if it was supplied by itself.
It charges itself VAT (at the standard rate – 20%).
Assuming VAT is charged on to the End user, the VAT is recoverable in the normal way.
This reverse charge prevents sub-contractors from charging VAT to the Contractor, but not paying to HMRC.
The Domestic Reverse Charge will apply to work such as; construction, demolition, repairs and alterations, drainage, painting and decorating, scaffolding, the installation of heating, lighting, water and power. It will also affect civil engineering, site clearance, excavation and foundations works.
The rules will apply to ‘construction services.’ The definition of construction services mirrors those used for the Construction Industry Scheme (CIS). It also includes goods supplied as a single package which includes construction services, including building materials.
For some services there will be no change in the way invoicing works, including the installation of seating, blinds, shutters and security systems. Also, the professional services of architects or surveyors and consultants of building and engineering, will not be affected although the definitive list is yet to be clarified.
Construction industry companies should contact their accounting software provider for guidance to ensure their software is fully up-to-date in time for the October deadline.
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The proposed plan for the new VAT procedures for the construction industry have been postponed until October 1st 2020.
For further information about the proposed VAT changes, our friends at IN Accountancy have an article online on the subject.
Caunce O’Hara & Co Ltd do not provide financial advice or advice regarding business banking, account or VAT. For advice you should consult your accountant and/or your business banking supplier.