Thank you to the Taxation Magazine for publishing this helpful article on this somewhat complicated subject.
HMRC reminds construction industry businesses to make sure they are ready for important changes to the VAT rules that come into force later this year.
From 1 October 2020, the VAT reverse charge will be introduced for VAT-registered contractors and subcontractors in the construction industry. Simply put, these rules mean that the customer (contractor) must pay the VAT due on building and construction services they receive to HMRC, instead of the supplier (subcontractor). The supplier’s invoice must make it clear to the customer that the reverse charge applies and the customer can then recover the VAT on the same VAT return, in line with normal rules.
The VAT reverse charge applies only to transactions between VAT-registered contractors and subcontractors where payments must be reported through the construction industry scheme (CIS). The new changes are being implemented as a response to missing trader fraud and are designed to prevent annual losses estimated at about £100m.
If a business is not VAT registered, or if it provides services directly to an end user or someone connected to an end user (including private individuals, landlords and tenants) the VAT reverse charge will not apply.
What Must be done
To make sure that affected businesses are ready for the changes, they will need to:
- Ensure their accounting systems can process reverse charge supplies and check that supplies and purchases are correctly treated from 1 October 2020;
- Consider the impact these changes will have on cash flow;
- Consider taking appropriate steps, such as applying for monthly VAT returns or reviewing terms with suppliers and customers;
- Visit the GOV.UK website (tinyurl.com/3o6jtkk) for further information
Subcontractors will also need to confirm that they are working for a VAT-registered contractor and that the payment they receive has been or will be reported through the CIS.
Reverse charge help
HMRC understands that implementing the domestic reverse charge could cause difficulties. The department will therefore apply a light-touch approach for errors made in good faith within six months of the introduction of the legislation.
FIND OUT MORE
- If there is uncertainty around the CIS treatment, contact the CIS helpline on 0300 200 3210 (or +44 161930 8706 if outside the UK)
- If there is uncertainty as to whether the reverse charge applies, contact the VAT helpline on 0300 200 3700 (or +442920501261 if outside the UK)
- Construction industry scheme; a guide for the contractors and subcontractors (CIS 340)
- HMRC guidance – Buildings and construction (VAT Notice 708)
- HMRC guidance – Domestic reverse VAT charge for building and construction services