VAT changes could cause problems to those in the Construction Industry

The introduction of the VAT domestic reverse charge (“reverse charge”) for organisations working in the construction industry is a considerable change and has brought tax back into the spotlight within the sector.

The impacts of these changes are wide-ranging, so it’s crucial for organisations operating in the construction industry to start planning now, to ensure they are ready from 1 October 2019.

What is the impact of the domestic reverse charge?

The Government has confirmed the following:

  • The reverse charge will be applicable to construction operations for Construction Industry Scheme (CIS) purposes. As a result, this complex area has been brought back into the spotlight.
  • To prevent the provider of the goods or services from disappearing or failing to pay the VAT due, the purchaser of the goods or services (the customer, not the supplier) will account for the VAT due to HMRC by declaring the VAT due as output tax on its VAT return. The purchaser will also be able to reclaim the VAT as input tax under the normal rules.
  • The domestic reverse charge will apply from 1 October 2019, to give time for businesses to incorporate the new rules into their existing processes, including accounting and IT systems.
  • Sales to an end user (a business that does not make supplies of construction services) or domestic customer will be outside the scope of the reverse charge.
  • To prevent anti-avoidance, there will be no threshold to exclude any business, widening the scope of the changes.
  • Affected businesses will have statutory invoicing and reporting requirements like other reverse charges.
  • Organisations will not be required to operate the reverse charge on exempt or zero-rated supplies.

Therefore, there will be additional compliance obligations for contractors within CIS and cash flow implications for the subcontractor (or supplier). 

What are the reporting and invoicing requirements?

Affected organisations will have reporting and invoicing requirements that may, at first, seem counterintuitive to those who have no experience of the reverse charge. The supplier is still required to issue a valid VAT invoice, and this must include all the information normally required on a VAT invoice. This should include reference to the amount of VAT liable on the supply; however, the supplier must not charge this as VAT on the invoice. Instead, the supplier must directly reference that the VAT reverse charge applies to the supply. HMRC have confirmed that the following reference will meet the invoicing requirements:

“Reverse charge: VAT Act 1994 Section 55A applies”

Will there be any changes to the Construction Industry Scheme (CIS)?

Despite no legislative changes to CIS we have seen increased activity from HMRC within the sector, including compliance visits where several common errors have been identified by HMRC.

Typical compliance errors which often arise in CIS include:

  • Failure to determine that a construction contract is within CIS;
  • Incorrectly excluding activities from CIS;
  • Subcontractors overstating material elements or including the cost of their own plant or their own scaffolding as a deduction;
  • VAT registered subcontractors including VAT as part of their material costs; and
  • Failure to apply CIS to certain recharges between entities within an organisation.

Although HMRC have stated that they will operate a light touch period for errors made in the first six months from implementation for the reverse charge, preparation is key to ensure a smooth transition into the new rules from 1 October 2019.

To learn more about the upcoming changes and actions to take, join us on 11th September, 10am for our webinar where our construction sector experts will share experience of the assistance they are providing to clients in the industry, as well as providing an update on recent guidance issued by HMRC.

By Ian Goodwin, Patrick Crookes and James Davies