Published: 16/07/2018 By Bradley SucklingUnder new rules due to come in on 1 October 2019 builders, sub- contractors and other trades associated with the construction industry will have to start using a new method of accounting for VAT.
The measure is designed to combat VAT fraud in the construction sector labour supply chain which HMRC argue presents a significant tax loss. HMRC has now published draft legislation to introduce the Reverse Charge for Construction Services.
Under the proposed new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the reverse charge a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) would then account for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT - leaving a nil net tax position. This is intended to ensure that VAT is correctly accounted for on supplies by sub-contractors.
CONSTRUCTION WORK AFFECTED
The reverse charge will apply to a wide range of services in the building trade, including construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, and foundation works. The definitions have been lifted directly from the CIS legislation.
Professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape are not covered by the new rules. The draft legislation sets out other work to which the reverse charge does not apply. It is hoped that the legislation and guidance will be finalized by October 2018 to allow businesses at least 12 months in which to make the necessary changes to systems.
WHAT ARE THE IMPLICATIONS OF THE NEW RULES?
This will be a significant new burden in addition to the commencement of Making Tax Digital in April 2019 and HMRC are encouraging businesses to prepare early for these changes.
Failure to comply with the new VAT rules may lead to penalties and any output VAT wrongly applied to an invoice will be chargeable by HMRC but not necessarily recoverable.
Please contact us if you are likely to be affected by these changes and we can work with you to ensure you are ready for the new system.