The Reverse Charge – the VAT changes impacting the construction industry

It is less than 12 months now until new VAT rules affecting builders, contractors and other workers in the construction industry, will become law.

 

The construction industry is renowned for VAT fraud and the new regulations which come into force in October 2019, hope to combat this, however can be a minefield for those who have already been complying legitimately for years.

 

As a general rule, currently it is the supplier of goods or services who is required to account for VAT on those supplies.

 

However the draft legislation published by the HMRC applies a VAT Reverse Charge to construction services. It will make supplies of standard or reduced rated construction services (‘specified supplies’) between construction or building businesses made on or after 1st October 2019 subject to the domestic reverse charge, meaning that the customer will be liable to account for VAT due, instead of the supplier.

 

Under the new Reverse Charge rules, there will be a significant change for invoicing of supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain. Eg a main contractor would account for the VAT on the services of any sub-contractor and the supplier would not invoice for VAT. The customer (main contractor) would account for VAT on the net value of the supplier’s invoice and at the same time deduct that VAT – leaving a nil net tax position.

 

There are of course exclusions to the changes and it is best to speak to your contact at KPP who can advise on specifics. It should be noted however that the new rules should not apply where the recipient of the supply:

 

  • Does not on-supply the construction services, so it is an end user of those services (eg an owner-occupier or a tenant receiving services from a landlord or vice versa).
  • Is a tenant (or licensee) who on-supplies the construction services to its landlord (or licensor),
  • Is a landlord (or licensor) who on-supplies the construction services to its tenant (or licensee), or
  • On-supplies the construction services to a connected person, and that connected person uses the services itself (that is, the connected person does not on-supply the construction services).

 

There are less than 12 months for affected businesses to plan accordingly and to understand how they may be impacted by the change. Amongst other things they will need to ensure that as suppliers they do not charge VAT incorrectly, or as recipients, they apply the Reverse Charge correctly.

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