VAT – Domestic Reverse Charge
In order to tackle VAT fraud in the construction industry HMRC will introduce a domestic reverse charge with effect from 1 October 2019. This means a person supplying certain construction industry services to a VAT-registered customer will no longer be required to account for VAT. (The change will only apply if VAT at 20% or 5% applies to the works carried out, not zero-rated works). Instead the business customer will account for VAT under the Construction Services Domestic Reverse Charge (“CSDRC”) or “reverse charge” arrangement. The new rules will cover construction services reported under the CIS and associated materials supplied as part of the contract (but not architects or surveyor services or similar). This will include:
- construction work to permanent or temporary buildings or structures and civil engineering work (e.g. roads or bridges):
- Groundworks and other preparatory works
- Construction, alteration and repair
- Installation of systems for heat, light, power, water and ventilation
- Painting and decorating
The impact on the construction industry is potentially significant, not only in terms of cash flow, but construction firms will also have to make changes to their systems to account for the reverse charge and put in processes to monitor the supplies. In addition, the new rules will mean that the customer will be responsible for the correct treatment of VAT and they will also be required to identify if they are the end user of the supply chain, information which could be commercially sensitive. There is no change for supplies to end-users / consumers, who will continue to be charged VAT in the normal way.
In advance of 1 October 2019, construction firms need to consider the following:
- the potential impact on cash flow from not charging or receiving VAT payment
- changes that need to be made to accounting and invoicing systems to identify and take account of reverse charging and the ongoing monitoring of payments
- potential interaction with self billing
- customer status, to determine where reverse charges will be required to be made post October 2019
- Staff training
- Whether contracts need to be amended, particularly standard contracts
The government has estimated that between 100,000 and 150,000 companies will be affected by the new rules which have been introduced as part of their mission to clamp down on ‘missing trader fraud’. Although the number of criminals carrying out this kind of scam in construction is low, they are believed to be making a significant amount of money and unfortunately the whole of the construction industry will now have to pay the price.
As with all new rules, it’s important to plan as early as possible for the change over, as cash flow for some businesses in particular is likely to be significantly impacted by this change.
Alan Davis, VAT Partner & Chairman, MHA Henderson Loggie