VAT reverse charge construction industry
A change to the VAT rules first announced at Budget 2018, will come into effect from 1 October 2019. This change will make the supply of construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector. The introduction of this reverse charge targets fraud where VAT due to HMRC is never paid by a building subcontractor.
New guidance on the workings of the domestic reverse charge (referred to as the reverse charge) has been published by HMRC. Using the reverse charge procedure changes the usual VAT treatment such that the customer receiving the service is liable to account for the VAT due rather than the supplier. There is no cash impact for building clients affected. The main contractor will pay the subcontractor the amount of their charge excluding VAT. They will simply add the VAT reverse charge to their return and claim back the VAT amount as input VAT.
The reverse charge will affect certain specified supplies of building and construction services supplied at the standard or reduced rates that are reported under the Construction Industry Scheme (CIS). These are called specified supplies. This will place the onus for dealing with the VAT charge due on subcontractors’ bills to the main contractor.
There are now less than 4 months until the new rules come into effect and businesses that will be impacted should already be making the necessary preparations. HMRC has said that they understand that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.