HMRC announced in the budget of 2017 that a domestic reverse charge for VAT for building and construction services was to be introduced from 1 October 2019.
The legislation is an anti-fraud measure, which removes the opportunity for fraudsters to charge VAT and then go missing, before paying it over to HMRC. This is commonly referred to as ‘missing trader’ fraud. HMRC consider that VAT fraud in construction sector labour supply chains presents a significant risk of tax evasion. Organised criminal gangs fraudulently take over or create shell companies to steal VAT whilst operating alongside actual construction services.
The summary of impact statement published at the 2018 budget shows that HMRC expect this measure to generate £0.5bn over 5 years.
Where supplies are reported on a Construction Industry Scheme (“CIS”) return and they are standard or reduced rated for VAT, the transaction will be subject to the domestic reverse charge. As a result, the customer receiving the specified service has to pay the VAT to HMRC instead of the supplier. The HMRC domestic reverse charge guidance provides further details of what is included / excluded and how to account for the VAT.
This change applies to supplies made by subcontractors whether they are gross or net paid under CIS and applies to both labour only and combined labour and material supplies. The reverse charge will apply to all individuals or businesses registered for VAT in the UK who supply or receive specified services regardless of the turnover, i.e. there is no minimum supply value that this applies to.
The customer can recover the VAT, subject to the normal VAT recovery rules, however, the supplier no longer receives any VAT on the payments they receive that fall within the remit of CIS. For subcontractors therefore, cash flow could be impacted from a reduction in the VAT received on supplies made. As the measure does not affect material only supplies, VAT on such supplies will continue to be accounted for under the normal VAT rules. If your business is affected by the domestic reverse charge on your supplies, it is likely that you could move from a net payment position on your VAT return to a net repayment position. You can look at changing to monthly VAT return submissions to allow you to receive this repayment more regularly. You can find out more on your online VAT account.
What do you need to do to be ready for the 1st October?
To prepare for the domestic reverse charge, you will need to look at:
- the HMRC domestic reverse charge guidance to understand the rules, obtaining advice as required
- whether the reverse charge affects either your sales, purchases or both, including confirming clients/subcontractor positions as appropriate
- your cash flow position and how the changes will impact, looking into monthly VAT returns if necessary
- making sure your accounting systems and software can deal with reverse charge transactions
- ensuring all your staff responsible for VAT are familiar with the rules for the reverse charge
Further guidance can be obtained from the HMRC domestic reverse charge guidance.
HMRC are running webinars for businesses, with the next two being scheduled for 2 September and 18 September respectively. You can register here: HMRC webinar registration.
HMRC consumer forum for the domestic reverse charge for construction services is a useful place to ask any questions you may have (and likewise see answers that other businesses have raised): HMRC forum.