VAT Reverse Charging in the Construction Sector

The VAT Domestic Reverse Charge for Building and Construction Services is a major change to the way VAT is collected in the building and construction industry. It is designed to combat VAT fraud which amounts to a staggering £100 million per annum and will have a significant impact on both VAT compliance and cashflow.

Originally due for implementation on 1st October 2019, HMRC announced a year’s delay due to uncertainty surrounding Brexit, also due to the fact that so few people were actually ready for the change, as well as allowing HMRC time to address some perceived weaknesses in the existing guidance. As a result, the start date is now October 2020.

VAT Reverse Charging - An Overview

VAT Reverse Charging in the Construction Sector is a change to how VAT is handled for specific types of construction services throughout the UK. It also incorporates the building and construction materials used directly in those services. It’s important to note here that it doesn’t apply to those materials supplied separately of construction services.

This plan means that those organisations supplying construction services to a VAT registered customer, will no longer have to account for the VAT, instead, this will be the responsibility of the customer. In other words, a customer receiving the supply of construction services will be responsible for the payment of VAT direct to HMRC, as opposed to paying it to the supplier. It will only apply to businesses and individuals registered for VAT in the UK.

Supplies made between connected parties, to end users and supplies between landlords and tenants will all be excluded from new rules.

Make sure you’re ready

New legislation always calls for good preparation to ensure compliance. As a result, ensure you fully understand what you need to do to prepare for October 2020 by answering the following questions:

• Does the Reverse Charge affect your purchases, sales or both?
• Are your accounting systems able to deal with the Reverse Charge?
• What impact will the change have on your cash flow?
• Are all of your staff who are responsible for VAT accounting, familiar with the legislation and how it will work within your business?

If any of these questions are left unanswered, make sure you begin exploring how you will tackle these items – October may seem like a long way off, but it will be upon us in no time at all. Any errors made in the first six months will be approached with a ‘light touch’ as long as you’re seen to be trying to comply with the new legislation. Thereafter, you need to have it in-hand. The GOV.UK website has a comprehensive overview of this legislation and so if in doubt, take a look here.

Services Included

• Construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations
• Construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines etc.
• Installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
• Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
• Painting or decorating the internal or external surfaces of any building or structure
• Operations which form an integral part of, or are preparatory to, or are for rendering complete, such operations as are previously described in this subsection, including site clearance, earth-moving, excavation, tunneling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

Services excluded

• Drilling for, or extracting, oil or natural gas
• Extracting minerals (using underground or surface working) and tunneling, boring, or construction of underground works, for this purpose
• Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
• Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
• The professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
• Making, installing and repairing art works such as sculptures, murals and other items that are purely artistic
• Signwriting and erecting, installing and repairing signboards and advertisements
• Installing seating, blinds and shutters
• Installing security systems, including burglar alarms, closed circuit television and public address systems.

Cash flow considerations

Careful cash flow planning and forecasting will be imperative to ensure you don’t encounter any financial issues or difficulties within your supply chain. At present, many suppliers utilise the VAT paid by their customers to pay their suppliers until it’s needed by HMRC with their next VAT return. However, when this new legislation comes into practice, companies will need to be aware that payments will be received net of VAT. If a business fails to take this into consideration, they could be left unable to pay the supplier and worst-case scenario, could face business closure. So, again, as always, preparation is key.

Comprehensive cash flow forecasting is the best way to prepare for this. Ensure you update your model well in advance of October 2020 to ensure you are still able to meet your obligations. This will enable you to decide whether a change between monthly and quarterly VAT returns would be of benefit to your organisation.

Make sure you consider your supply chain. More sizeable businesses should naturally be better equipped to cope with the looming changes, due to resources and capacity to facilitate change. However, smaller contractors may struggle to prepare in good time and if they run into financial difficulties, this could severely affect the supply chain. Therefore, if you are a main contractor, make sure any subcontractors know of the changes, how the changes should be implemented and how it could affect their cash flow.

Next Steps

Once the guidance has been fully finalised, the HMRC will issue official guidance and as mentioned previously, will operate a light-touch to any genuine mistakes made in the first six-month period. If you require further guidance on this subject, please do not hesitate to contact us on: 0330 041 5255, or, complete our online Contact Form.