Effective from 1 October 2019: this is a major change to the way HMRC will collect VAT in the construction industry
This will apply to any VAT registered construction businesses which either buy or sell specified building services as listed on Construction Industry Scheme (CIS).
Current VAT rules
A builder charges VAT to their customer, receives payment of the VAT and declares it on their VAT return.
This will change for supplies between VAT registered builders will adopt a process known as the reverse charge
After 1 October, the builder will invoice their registered builder customer without charging VAT. Their customer then makes the entry on their own VAT return.
Any goods supplied by the builder as part of their work is also covered by these reverse charge rules.
Reason for the change
HMRC wants to remove the potential for VAT fraud. There have been instances where suppliers have charged VAT to their customer, received payment of the VAT but failed to declare it on their VAT return. The new reverse charge rule aims to prevent this from happening in the first place as the supplier will not be paid any VAT.
Fred is providing plumbing services work in a warehouse renovation, and will invoice the main contractor, John. (Fred is VAT registered).
John is also VAT registered, and is an ‘intermediary supplier’ because he is making an onward supply of construction services to the owner of the warehouse – the ‘end-user’.
Fred’s invoice of £3,500 to John is subject to the new procedures and no VAT is charged.
Fred’s VAT return will only include the value of the sale (outputs) on his VAT return:
- Box 6 – outputs = £3,500.
John will do the reverse charge calculation and add the following entries on his VAT return:
- Box 1 – output tax £700 (£3,500 x 20%)
- Box 4 – input tax – £700 (same figure as Box 1)
- Box 7 – inputs – £3,500 (net value of payment made to John).
Other issues to consider
Continuing with the above example, Fred and John each have their own responsibilities under the new rules.
- Fred must check whether John is CIS (Construction Industry Scheme) registered and also has a VAT number
- On his sales invoice, Fred must also specify the amount and rate of VAT (either 5% or 20%) that John must declare with the reverse charge
- Fred should include wording on his sales invoice along the lines of: ‘Reverse charge: customer to pay the VAT to HMRC’
Main contractor responsibilities
John must inform Fred if he is an end user or an intermediary supplier.
In our above scenario the reverse charge applies. John is the intermediary supplier, so Fred will not add VAT.
It is important that John does not incorrectly pay VAT to Fred because HMRC could raise an assessment for the VAT that he should have declared, had the reverse charge been administered correctly.
Are they VAT registered?
Check to ensure any building contractor clients invoiced under the new rules are registered for VAT. (See Section 9 of HMRC VAT Notice 735: Domestic reverse charge procedure) for more information.
If there are any doubts about the credentials of a builder customer, HMRC recommends a deposit equal to the VAT amount not being charged should be requested from the customer.
- Review all contracts with subcontractors to check whether the reverse charge is applicable
- Will the reverse charge affect your sales and/or purchases?
- Has your accounting system been updated to deal with the reverse charge calculations?
- Are your accounting staff familiar with the new reverse charge rules?
HMRC have confirmed it will not initially be charging penalties for mistakes (until 31 March 2020), unless they deem that “you are deliberately taking advantage of the measure by not accounting for it correctly.”