GREAT NEWS – A plan by HMRC to introduce new procedures for paying VAT in the building and construction industry have been postponed for 12 months until 1 October 2020.
ORIGINAL ARTICLE FOLLOWS BELOW:
More changes are afoot from 1 October 2019 (now delayed until 2020 in the world of accounting for VAT, this time specifically relating to the building and construction industry.
Known officially as the “VAT reverse charge for building and construction industry services”, this is a change to how VAT is handled for certain kinds of construction services as well as some materials used directly in associated services.
What is changing?
In simplest terms, this charge is effectively an extension of the CIS (Construction Industry Scheme) to include VAT.
It will only apply to transactions between VAT registered contractors and sub-contractors, and means that only the customer will have to account for VAT rather than those supplying construction services. So sub-contractors will no longer have to account for VAT and will instead require the contractor employing them to handle and pay the VAT directly to HMRC.
What services does this apply to, and from when?
The VAT domestic reverse charge applies to both standard and reduced rate VAT supplies. It does not however apply to zero-rated supplies. It comes into effect from 1 October 2019.
If a construction project begins before the reverse charge becomes law, but ends after it comes in, then the VAT treatment will be determined by the tax point date (ie the date of the VAT invoice or the date payment is received). If the tax date is before 1 October then current rules apply. If it’s on or after this date, then the reverse charge rule should be applied.
Who does it apply to?
It only applies to VAT registered businesses who are also registered with the CIS and use the CIS to report payments (so when we say ‘only’, this will impact the majority of VAT registered construction contractors and sub-contractors in the UK).
What do you have to do if this applies to you?
If you run a VAT and CIS registered business, and receive an invoice for construction services with the reverse charge applied, then you will need to account for the VAT element of the invoice when you complete your VAT return (as part of your overall input VAT) as if you have charged the VAT yourself.
If you are not VAT registered, then your supplier will need to account for their VAT in the normal manner. We would suggest that you write to your suppliers and make it clear that this is the case.
What to do if you are a VAT and CIS registered sub-contractor?
If you supply CIS regulated construction services, in terms of invoicing your suppliers, nothing changes.
However, as your suppliers will only be paying you the net amount and keeping the VAT element to pay over to HMRC when they complete their next VAT return, you may need to keep an eye on your cash flow, at least in the short term.
It will also mean that because you are no longer paying over VAT to HMRC each quarter and instead only claiming VAT back on VAT-able purchases, you are likely to receive a VAT refund each quarter. HMRC refers to such businesses as a repayment trader.
How can you improve your cash flow if you do become a repayment trader?
One option open to you is to switch from quarterly accounting for VAT to completing monthly VAT returns. Clearly there is more administration involved, but this would help you claim back any VAT owed to you more quickly.
A word of caution however: HMRC currently seem to be very slow in updating any information relating to VAT; from registrations to changes of addresses to quarter end amendments. Therefore, just because you apply to move to monthly VAT returns, this does not mean that it will be implemented swiftly and you should keep a close eye on your VAT account to enusre you do not inadvertently miss a deadline.
What to do if you are a VAT and CIS registered Contractor?
If you purchase CIS regulated construction services, then you need to be sure that you correctly account for any reverse charge VAT invoices which you receive.
You may actually have a small positive impact on your cash flow as you will not need to pay the VAT element of the invoice received over to the sub-contractor, but will instead pay it over to HMRC when your next VAT return falls due. So you will hold on to the VAT man’s money for a little longer.
Do be careful however to ensure you do not accidentally spend this money in the interim period – we always recommend setting up a separate bank account for your various pending tax liabilities if you not want to run this risk!
You will also need to be careful that any services listed are eligible for the reverse charge, and indeed that they are charged at the correct rate.
What else do you need to consider?
Please note that if you are invoicing / receiving an invoice for mixed supplies, then the reverse charge should be applied to the whole invoice to keep things as simple as possible in terms of administration.
This VAT reverse charge is limited to UK companies providing their construction services in the UK, so if you undertake any work overseas this does not apply.
Reverse charge supplies are also excluded from the Flat Rate VAT scheme, and so should be accounted for in the normal manner.
This is a mandatory change, so businesses are either subject to it, or not. It is a domestic VAT rule and therefore will continue to apply after Brexit!
For further details on these changes, you can visit the Gov.uk website and read HMRC’s guidance on VAT: domestic reverse charge for building and construction services
This is a lot to take in, so if you do have any questions, the IN Team are here to help as always – you can send us your questions in all the usual ways: https://www.in-accountancy.co.uk/contact/ or view our construction accounting service.