VAT CHANGES IN THE CONSTRUCTION INDUSTRY – ARE YOU READY?

The construction industry needs to make sure it’s ready for important changes to VAT rules that come into force later this year.

From 1 October 2020, the VAT reverse charge for VAT registered contractors and/or sub-contractors in the construction industry will be introduced.

Simply put, these new rules mean that the customer (contractor) will have to pay the VAT due on building and construction services they receive to HMRC, instead of the supplier (sub-contractor).

The supplier marks up their invoice to make it clear to the customer that the reverse charge applies and the customer can then recover the VAT on the same VAT return, in line with normal rules.

The VAT reverse charge applies only to transactions between VAT-registered contractors and sub-contractors where payments must be reported through the CIS (Construction Industry Scheme).

The new changes are being implemented as a response to missing trader fraud and will prevent losses estimated at around £100 million per year.

If a business is not VAT-registered, or provides services directly to an end user or someone connected to an end user (including private individuals, landlords and tenants) the VAT reverse charge will not apply.

What you need to do

To make sure that you’re ready for the changes, you will need to:

• ensure that your accounting systems can process reverse charge supplies and check that supplies and purchases are correctly treated from 1 October 2020;

• consider the impact these changes will have on your cash flow;

• consider taking appropriate steps, such as applying for monthly VAT returns or reviewing terms with your suppliers and customers;

• visit the gov.uk guidance for further information.

Sub-contractors will also need to confirm that they are working for a VAT-registered contractor and the payment they receive has or will be reported through the CIS.

HMRC understands that implementing the domestic reverse charge could cause some difficulties. This means that HMRC will treat good faith errors made within the first six months of the legislation with a light-touch approach.

The flowchart below gives an easy step-by-step guide to the changes.

If there is any uncertainty around the CIS treatment, you should contact the CIS Helpline on 0300 200 3210 (or +44 161 930 8706 if outside the UK).If there is any uncertainty as to whether the reverse charge applies, you should contact the VAT Helpline on 0300 200 3700 (or +44 2920 501 261 if outside the UK).