HMRC have recently announced the introduction of a VAT Reverse Charge with regards to the Construction Industry. Whilst this term is new territory for the construction industry, this VAT treatment is already resident within other industries such as mobile phone and electricity.
Three important questions at the tip of our tongue:
- Who does this apply to? This only applies to supplies of building and construction services where your customer is registered for both VAT and CIS and these supplies are either standard rated or reduced rated.
- When does this apply? These new VAT rules are due to come into force in October 2019.
- Why?! HMRC believe that the introduction of these new VAT rules will significantly reduce the impact and existence of “missing trader fraud”. In short, this is the process of events whereby a supply chain is set up, with various intermediaries, and VAT is collected with no intent to pass this over to HMRC. The VAT Reverse charge is intended to prevent this by ensuring that VAT is paid over and reclaimed at the same point, ensuring HMRC do not lose out.
Two initial essential parts to this: establishing if your customer is the end user of your services and establishing if your customer is VAT and CIS registered.
If your customer is both VAT and CIS registered, and they are not the end user of the services provided, VAT reverse charge scheme will apply. Once under this VAT arrangement, you will consequently omit charging VAT on your invoice. A tax shift mechanism will take place and effectively your customer will adopt the “collection of output tax” role. As a result, the customer will account for both output and input VAT on their VAT Return. On the other hand, where the customer of the supply of construction services has confirmed that they are instead the “end user” of these services, the VAT reverse charge will not apply and VAT will be charged in the usual way.
VAT Reversal Charge will likely always apply in situations where there is Business to Business supplies of construction services between VAT registered businesses and the customer’s activities then provide an ongoing supply of the same construction and building services to another user.
How does this work practically?
Establishing Customer – Supplying services in the realms of CIS requires you to establish the position of your customer. Your customer is required to confirm, in writing, that they are the end user of the construction services to trigger the treatment of VAT under the normal method. Penalties may be due where the VAT Reversal Charge is not implemented correctly, however, HMRC have confirmed that there will be a 6 month period, following implementation date, where errors will be looked at more lightly.
Administrative Changes – Where the VAT Reverse Charge applies, declaration must be made, in words, on your invoices that this VAT treatment has been applied. This may require adjustments to systems which generate the invoices.
Cash Flow Considerations – Under the VAT Reversal Charge, the supplier passes the responsibility of charging VAT to the customer. As a result, the supplier charges and receives only the net amount.
Suppliers must consider the cash flow impact of receiving only the net amount and losing out on the benefit of retaining the output VAT for the time period prior to paying this over to HMRC.
HMRC have provided initial guidance on this which can be found at www.gov.uk/government/publications/vat-reverse-charge
Further announcements and guidance are expected from HMRC over the coming months.
Please do not hesitate to contact your usual Drummond Laurie contact to discuss further.