In the latest of a series of blogs we’ve written for clients on the subject, below we’ve simplified the HMRC Guidance Notes to help ensure you’re prepared well in advance.
What is the Domestic Reverse Charge?
The reverse charge will apply throughout the supply chain to any B2B construction supplies, shifting the responsibility to the final customer or ‘End User’, whereby suppliers will no longer invoice for VAT, and instead, their invoice must show the following: “the service is subject to the domestic reverse charge”. This will mean that unless the customer confirms that they are not the End User, they will account for the VAT through their own VAT return at the appropriate rate.
As a result, all subcontractors, construction workers and small businesses within the sector will need to make major changes to the way they account for and report their VAT payments, impacting SME’s with cash flow issues where there is no VAT charged.
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 are the services that will be affected?
The domestic reverse charge will only affect supplies at the standard or reduced rates where payments are required to be reported through the Construction Industry Scheme (CIS), therefore affecting supplies between sub-contractors and contractors unless they are supplied to a contractor who is an end user (i.e. a recipient who uses the building or construction services for themselves).
The Reverse Charge will apply to the following building and construction services at either standard or reduced rate VAT:
| 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, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence |
| 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 |
For further information on the services, please click here.
How do I know if normal or reverse charge VAT rules apply?
We have referenced the guidance notes from HMRC to explain the process below:
| If the answers to the following questions are NOthen normal VAT Rules apply: · Do the supplies you’re making fall within CIS or will your payment be reported under CIS? · Would the supply be considered either standard or reduced rated? · Is your customer VAT registered? |
| If the answers to the above questions are YES but your customer has NOT provided confirmation that they are an End User, then the Domestic Reverse Charge will apply. |
| If the answers to all of the above questions are YES and your customer HAS provided confirmation that they are an End User, then Normal VAT Rules apply. |
HMRC Reverse Charge deadlines and penalties to be aware of:
The Domestic Reverse Charge VAT rules come into effect on 1stOctober 2019 for invoices with a tax point after this date. Any invoices issued with a tax point beforehand will not be subject to the rules.
For any errors that occur within the first six months of the Domestic Reverse Charge being effective, HMRC may be more lenient in their dealings, given these can be considered difficult measures to understand and implement. Please do not take this as leeway to delay your implementation of the new rules – any business discovered to knowingly claim End User status when in fact the reverse charge should have applied, will be liable to pay the tax and suffer penalties.
For the full HMRC guidance notes on the Domestic Reverse Charge, published June 2019, please click here.
How can I minimise the impact of the VAT changes?
- Find the evidence now:You’ll need to start identifying which supplies to your customers or 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 rules.
- Allow 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, invest in training for staff members.
- Manage your cashflow:For small businesses or companies who operate within a tight cashflow system, extra preparation and planning will be necessary to account for change in how VAT payments are dealt with.
As a business within the construction sector or if you are working as a contractor or subcontractor, and are feeling overwhelmed with the upcoming changes, we can help you prepare for the implementation of the Reverse Charge. Please contact the LWA Tax team in Warrington on 01925 830 830 or call our South Manchester office on 0161 905 1801.