Changing The Way Construction Firms Account For VAT


From October 1st this year, construction supplies between businesses under the Construction Industry Scheme (CIS) will be subject to the Domestic Reverse Charge (DRC).

In a bid to ensure VAT payments are not lost within a line of invoices between sub-contractors and contractors, DRC prevents two VAT-registered persons claiming or charging for VAT.

This change will only impact the supply of standard or reduced rate construction services between businesses.

Changing-The-Way-Construction-Firms-Account-For-VAT

Why The Construction Industry?

Inspired by the actions of the Missing Trader Intra-Community (MTIC), fraudsters within the construction industry reclaim VAT from a sales invoice that is destined for HMRC. They then disappear before an invoice is raised to the end user who, rightly so, will claim back VAT that has never been acquired.

The cost of such activity has a high price for the UK Exchequer, with HMRC’s 2016-2017 Tax Gap report showing £500 million in missing payments. With these numbers required to be accounted for, it’s not a surprise that HMRC want to stop it in its tracks.

HMRC’s Solution

HMRC will hand over responsibility to the receiver of the supplies. The following changes will be enforced:

  • VAT-registered construction business that provides qualifying services to another VAT-registered qualifying business (who is not an end user) will not charge VAT on their sales invoice but note the invoice that the fees are subject to Domestic Reverse Charge.
  • The company who issues the invoice will not have to pay VAT on the sales invoice as VAT has not been charged.
  • The receiver of this invoice will not be entitled to reclaim VAT as there is no VAT charged.

The rate of VAT paid will depend on the type of building services given.

Changing-The-Way-Construction-Firms-Account-For-VAT

Who Is Affected?              

All construction related supplies between VAT registered people/companies, as defined by CIS, will have zero VAT effect, unless supplied to a construction customer who is an end user. HMRC have noted that they will be taking a light touch approach for the first six months.

The below rules help to avoid confusion when deciding if DRC is applicable to a certain job:

  • If there is a supply involving mixed supplies, DRC will be applicable to the whole supply, not just the CIS element.
  • If there has already been a DRC on a construction site between two parties, any subsequent supplies on that site may be treated under DRC rules.

What Sort Of Sales Does This Effect?

The general rule is: if in doubt and the payments are subject to CIS between two VAT-registered parties, HMRC recommend that DRC applies.

Preparing for The Reverse Charge

This change is only applicable to CIS-related transactions, those signed on to the scheme, and where both parties are VAT-registered. Our shortlist below shows a basic outline on affected parties’ next best step.

To ensure you are fully compliant before October 1st, 2019, speak to our VAT specialist today.

Checklist:

  • VAT cashflow: If you currently rely on the extra cash received while waiting to pay your VAT bill, you will have to consider the impact of losing this amount.
  • Have procedures in place to check that you have not been incorrectly charged for VAT for supplies.
  • Understand if you fall under ‘end-user’ status.
  • Use accounting software that ensures you are compliant with the legislation.

If your customer is the end user, the rules do not apply.


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