A major shake-up in the treatment of VAT in respect of building work is imminent.
Carolyn Van Hecke, Senior VAT Manager in our Property and Construction team, highlights the implications for those in the construction industry and why it has never been so important to apply the correct VAT treatment.
Reverse charge VAT accounting rules will apply to all qualifying supplies made on or after 1 October 2019. This will mean that the customer receiving the supply of specified construction services must account for the VAT due rather than the supplier.
Suppliers of goods or services will no longer be involved in the payment of VAT to HMRC. Instead, the liability for VAT payment will be with the customer. Under the new regime, a VAT-registered business, which supplies certain construction services to another VAT-registered business, will be required to issue a VAT invoice stating that the service is subject to the reverse charge.
The VAT registered customer will have to declare the VAT due as output tax on their VAT return and reclaim it via the reverse charge mechanism.
Why are HMRC implementing these new rules?
HMRC are making this change in an attempt to tackle VAT fraud. The new rules aim to prevent the situation where the contractor pays the sub-contractor the price plus VAT for services, but the sub-contractor then fails to account for the VAT to HMRC.
Who will be impacted?
The new reverse charge will apply to the same range of construction services that are currently covered by the Construction Industry Scheme (CIS). Specifically it will apply to B2B supplies of those services between VAT-registered businesses where the recipient then makes an onward supply of the same construction services.
HMRC believe they currently lose over £100m each year in VAT fraud related to the construction industry so it is unsurprising that they are taking steps to reduce the incidences of fraud and missing payments. It’s highly likely that HMRC will target construction businesses who get it wrong.
If you are involved with the construction industry and require specialist VAT advice, please Carolyn Van Hecke on 01204 414243.
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