From 1 October 2020, there will be a significant change in the way that VAT is collected in the construction industry. Customers receiving a service will have to pay VAT to HMRC rather than the supplier of the service. It will only apply to individuals and businesses that are registered for VAT. The reverse charge process is an effort by the government to combat VAT fraud as it can often be billed to customers but not passed on to HMRC.
The new rules will affect individuals and companies who “supply or receive specified services which are reported under the CIS (Construction Industry Scheme)”. A key difference with the CIS is that where materials are included within a service, the reverse charge will apply to the service as a whole, whereas the CIS does not provide deductions on the materials element in dealing with net status subcontractors. The reverse charge will not apply to zero rated services.
HMRC appreciates that the new process will create some initial difficulties when implemented. There will therefore be a “light touch” regime for dealing with any mistakes made in the first six months provided that those concerned have acted in good faith.
The introduction of the new process has been delayed until 1 October 2020, to give the industry more time to prepare for the changes and ensure that their employees in particular those working in accounts or credit control understand the new system and ensure invoicing correctly reflects the new process. There were also concerns raised that the changes would coincide with the UK’s exit from the European Union which had the potential to increase the negative impact on cashflow for businesses in the event of a no deal Brexit.
Examples of services which to which the reverse charge will be applied include:
- Works to construct, make alterations, extend, make repairs or demolish a building or structure , including offshore installations (whether the building or structure is permanent or temporary)
- Installation of lighting, heating, drainage systems and air-conditioning in any type of building or structure
- Decorating works or painting the internal or external surfaces of any structure or building
However some services will not be subject to the reverse charge, including:
- Installing or repairing art (including sculptures and murals)
- Installing signboards and adverts
- Installing security systems
HMRC does recognise that the new process will affect cashflow. Some businesses will no longer receive the VAT as it will be paid to HMRC by the customer and as a result they will no longer have the benefit of the VAT funds to help with cashflow that they previously received prior to paying them on the HMRC. The HMRC guidance suggests moving to monthly returns to speed up receipt of the payments due to be received from HMRC on claiming back VAT they have paid themselves may assist.
The extra 12 months should allow those in the construction industry to be ready for the changes by 1 October 2020, further details on the changes can be found at https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services