How will the new VAT changes affect the construction industry?
HMRC’s new domestic reverse charge rules come into force on 1st October 2019. From this date VAT on construction services will be paid to HMRC by the customer receiving the service, rather than the supplier who is issuing the invoice. This will have a significant impact on companies in the construction supply chain, affecting cash flow whilst adding an extra administrative burden.
What is changing with VAT in the construction industry?
Where the legislation applies:
- The supplier of construction services will no longer receive the 20% VAT when submitting invoices.
- The customer is now responsible for paying VAT to HMRC for services received. This can then be recovered as input tax under the usual rules.
What transactions will the reverse charge apply to?
The reverse charge will apply to the supply of specified construction services between VAT registered businesses, where the recipient then makes an onward supply of the services.
According to HMRC the services which are applicable include:
- constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
- constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours
- Pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- Painting or decorating the inside or the external surfaces of any building or structure
- Services which form an integral part of, or are part of the preparation or completion of the services described above - including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding,
- site restoration, landscaping and the provision of roadways and other access works
It will not apply when the services are being supplied to an end user, the supplies are zero-rated for VAT or when the recipient is not registered for the Construction Industry Scheme (CIS).
When will the reverse charge apply from?
The change in legislation will be implemented from 1st October 2019.
Why are the VAT changes being made?
The change is aimed at reducing VAT fraud within the construction industry, known as missing trader fraud.
How can you prepare?
- Understand your supply chain: Review your current supplies to and from other VAT registered businesses and establish whether the reverse charge will apply.
- Review systems: Make sure your accounting system is updated to deal with the upcoming changes.
- Consider cash flow: With many construction businesses relying on VAT as a form of cash flow it is important to consider the impact that losing this may have on your business.
- Communicate: Issue communications both internally and externally. Ensure your staff are aware and trained for the internal changes and that your supply chain is clear on their responsibilities.
If you are concerned about how these changes may affect your business or if you would like further information, please do not hesitate to contact us on 0203 019 4990 or email us at firstname.lastname@example.org.