You may have read our previous blog on the announcement, but in case you missed it, we have compiled the key points that you need to know for tax changes starting from 1st October 2019.
THE REVERSE CHARGE FOR BUILDING AND CONSTRUCTION SERVICES
As mentioned in our July blog, HMRC conducted a consultation in March-June 2017 which found a prevalence of organised criminal activity, with contractors and sub-contractors taking part in ‘missing trader fraud’ and extending the supply chain. To combat this, HMRC are introducing a new anti-fraud method of VAT accounting for construction workers and sub-contractors. This new measure will affect specified services and liability of construction services, meaning that the final customer will need to account the VAT regarding the purchases instead of the supplier.
The reverse charge does not apply to businesses that supply specified services to connected parties within a corporate group structure. In this instance, normal VAT accounting rules will be applicable.
WHAT WILL THE REVERSE CHARGE INVOLVE?
The reverse charge is designed to shift the responsibility to the final customer or ‘end user’, it will apply through the supply chain, where all payments are reported using the Construction Industry Scheme (CIS), until it reaches the end user.
Currently the risk of non-payment is credited to contractors and sub-contractors charging their customers VAT, but then ‘going missing’ and keeping the VAT payments for themselves. So, with this new measure passing the responsibility of paying VAT onto the final customer rather than the supplier, it should be impossible for missing trader fraud to take place, with the customer paying VAT directly to HMRC.
The new reverse process will see that:
- Main contractors/customers account for VAT on sub-contractor services and the net value of supplier invoices, and then deduct the amount of VAT to leave them in a nil net tax position.
- Suppliers do not invoice for VAT.
HOW WILL THE REVERSE CHARGE AFFECT CONSTRUCTION WORKERS?
Whilst catching out the offenders who have been avoiding VAT payment, this change is likely to impact around 150,000 businesses in the construction and building sector – even the honest businesses. The implementation of the reverse charge will need lots of preparation and planning in an attempt to minimise the consequential challenges to construction companies, specifically smaller businesses. The reverse charge will impact SME’s in terms of loss of cash flow where there is no VAT charge. During the consultation process and since the Autumn Budget 2017 announcement, HMRC has been working with trade associations and federations representing SME’s in the construction and building industry, and this will continue as HMRC develops guidance for the reverse charge.
Finding the evidence: Difficulties are likely to arise when identifying which customers/main contractors are liable for the reverse charge. This will include checking VAT registration and providing evidence that the customer is the ‘end user’, and then invoicing correctly according to the new process.
Additional time and costs: Small businesses are likely to see some financial impact, as they may be required to change or adjust their current accounting and IT systems, and invest in training for staff members to bring them into compliance with the new VAT payment rules.
Managing cashflow: For small businesses or companies who operate within a tight cashflow system, extra preparation and planning will be necessary to account for holding VAT payments until requested by the HMRC.
The successful roll-out of the reverse charge is expected to raise an average of £100 million a year which is great news for HMRC, but with error penalties in place for incorrectly invoicing the reverse charge or the output VAT collected by the HMRC, you need to get prepared on how to manage the new process of documenting and reporting VAT.
If you require further advice on this new reverse charge and have queries on how it will affect you, and what to do to prepare for its implementation in 2019, contact the LWA Tax team in Warrington on 01925 830 830 or call our South Manchester office on 0161 905 1801.