From 1st October 2019, new tax legislation will see the construction industry move to ‘reverse charge’ for VAT.
The changes are a response to what HMRC have described as significant VAT fraud in the industry and may impact a company’s cash flow.
Who is affected?
The domestic reverse charge will only affect supplies at the standard or reduced rates where payments are required to be reported through the Construction Industry Scheme (CIS).
Therefore, supplies between sub-contractors and contractors, as defined by CIS, will be subject to the reverse charge unless they are supplied to a contractor who is an end user.
End users will usually be recipients who use the building or construction services for themselves, rather than sell the services on as part of their business of providing building or construction services.
The legislation also allows for those connected to end users, including landlords or tenants, to also be treated as end users. Therefore, intra-group and leasing re-charges of building and construction services connected to the end user are also excluded from the reverse charge.
If the end user does not provide its supplier with confirmation of its end user status it will still be responsible for accounting for the reverse charge and unable to reclaim input VAT.
The legislation is designed so that if there is a reverse charge element in supply then the whole supply will be subject to the domestic reverse charge.
For instance, an invoice including both materials and labor will be subject to reverse charge.
In addition, if there has already been a domestic reverse charge supply on a construction site if both parties agree, any subsequent supplies on that site between the same parties can be treated as domestic reverse charge supplies. This should reduce doubt and speed up the decision-making process for both parties.
If still in doubt, provided the recipient is VAT registered and the payments are subject to CIS, it is recommended that the reverse charge should apply.
What does this mean for you?
1) From a supplier point of view:
• Validate sub-contractors for CIS purposes as usual
• Check and validate your CIS services customer’s VAT status
• Check if you have confirmation that your customer is the end user – keep a record of it
• If the customer isn’t VAT registered – No change to the current process, charge 20% VAT on income
• If the customer is VAT registered but also an end user – no change to the current process, charge 20% VAT on income
• If the customer is VAT registered but he is not an end user– reverse charge VAT is applied.
2) From a customer point of view:
• Inform your supplier whether or not you are the end user
• If you are the end user, you will be charged 20% VAT and you will be able to reclaim it if you are VAT registered
• If you are not the end user and the invoice is subject to CIS, the supplier’s invoice should be subject to reverse charge and you can’t reclaim any VAT on it
• If you are supplying CIS look at point 1.
How does reverse charge work?
• Invoices will have to state that the reverse charge is being applied and no output VAT should be charged
• The VAT registered customers will then need to charge themselves VAT and then claim relief in the normal way. They will do this by using the reverse charge tax rate.
• Zero rated projects are currently excluded.
Things to note
• If you are on the flat rate scheme – you may need to leave before 1st October 2019
• HMRC will apply a light touch if an incorrect treatment will be applied in the first 6 months from 1st of Oct 19
• Contracts already in place might be redrafting
• Projects existing prior to 1st of Oct will need split treatment if continuing post 1st of Oct.
If you need more information please give us a call.