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New VAT Rules For Businesses In The Construction Industry

The new reverse charge is quite a doozy ...

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HMRC has issued its policy paper for a VAT reverse charge regime for the construction industry. Recipients, not suppliers, will be responsible for VAT accounting for certain services ...

The new VAT reverse charge will affect a significant number of construction businesses!

The new VAT reverse charge will affect a significant number of construction businesses!

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This publication (or should I say 'blog') shows that this new 'reverse charge' will have a far wider scope than was initially thought. Any business operating in construction needs to review their position and keep an eye on how this draft legislation progresses.

"The reverse charge is designed to combat fraud in the construction sector!"

The new regime proposes that a VAT-registered business which supplies a range of construction services to another VAT-registered business will need to issue a VAT invoice saying that the services they have provided is subject to the reverse charge.

And then, the recipient has to account for the VAT on that supply through it's own VAT return instead of paying VAT directly to the supplier. The recipient can subsequently recover the VAT as an input tax when they prepare their next VAT return.

Reverse charging applies to those construction services already covered by the Construction Industry Scheme (CIS). More specifically, it applies to B2B supplies between VAT registered businesses where the recipient supplies the services forward to their own customers.

It does not apply when:

  • Services are supplied to the end user, such as the property owner, or directly to a main contractor that sells a newly completed building to the customer

  • The recipient makes onward supplies of those construction services to a connected company

  • The supplier and recipient are landlord and tenant or vice versa

  • The supplies are zero-rated

HMRC's original publication said that the reverse charge will apply to 'labour only' construction services, but it covers materials too.

"This means more businesses are subject to the reverse charge!"

The Government has acknowledged that there could be a significant impact on the construction industry if this proposal passes into law. Construction companies will need to change their accounting systems to accommodate the reverse charge and make sure that both supplies and purchases are correctly accounted for.

HMRC says that it is aware some businesses may suffer a reduction in cashflow when VAT is no longer collected from customers and used as working capital before paying it over to the Treasury each quarter.

There are other issues that the reverse charge could create:

  • Verification of which rate of VAT is applicable and ensuring that it is properly accounted for

  • Does the reverse charge actually apply? Contractors may need to disclose to subcontractors where in the supply chain they actually are. This may be commercially sensitive information that they would normally be unwilling to disclose

All construction businesses are encouraged to review transactions made both up and down the supply chain to establish whether any will be subject to the new VAT reverse charge from October 2019 when the legislation is expected to come into force.

"Would you like to know more?"

If you'd like to find out more about the proposed VAT reverse charge for the construction industry, then do give me a call on 01908 774323 or click here to ping me an email and let's see how I can help you.

Until next time ...


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More about Helen Beaumont ...

Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.

Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.

When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.