On October 1st 2020, the construction industry are going to encounter threatening and potentially troublesome changes to VAT regulations. With 2020 set to see the government introduce this transition to seek extinction of the theft of VAT from the government by organised crime gangs called ‘missing trader fraud’. In order to do so, a VAT reverse charge will be implemented within the construction industry.
What is VAT?
Value Added Tax (VAT) was born in 1973 and plays a large role in providing revenue for the government in the UK. It is a consumption tax that is added onto a product or service that increases in value at each stage of production or distribution.
What is VAT Reverse Charge?
VAT reverse charge means that customers are able to charge themselves VAT and pay it directly to HM Revenue and Customs (HMRC) rather than the supplier sending them an invoice at a later date, which in return stops suppliers from avoiding paying HMRC, also known as missing trader fraud.
Who is Going To Be Affected?
This VAT recharge will be enforced for businesses that provide services to other businesses which will then sell on to a consumer. It will not be implemented for businesses who are providing a service directly to the consumer.
Which Services Will be Affected by The Reverse Charge?
HMRC has said that the new tax scheme will affect businesses that provide specified services which are reported under the construction industry scheme (CIS) and will only qualify for businesses or individuals registered for VAT in the UK. It will not apply if the service is rated zero for VAT.
Third party recruitment businesses who supply workers and pay them to do a temporary job will not be affected by the reverse charge.
According to HMRC, the following are the services that will be affected:
- “Decorating or painting the inside or the exterior surfaces of any building or structure
- Site clearance, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works, earth-moving
- Constructing, repairing, altering, demolishing, extending or dismantling buildings or structures, including offshore installation services
- Reservoirs, pipelines, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- Altering, repairing, extending, demolishing, constructing of any works forming, or planned to form, part of the land, including walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours”
What Services Will not be Affected by The Reverse VAT Charge?
The following are the services that will not be affected by the reverse charge:
- “Drilling for, or extracting, oil or natural gas
- Installing seating, blinds and shutters
- Installing security systems, including burglar alarms, closed circuit television and public address systems
- Making, installing and repairing art works such as murals, sculptures and other artistic items
- Signwriting and erecting, installing and repairing advertisements and signboards
- architectural or surveying work, or of building, engineering, interior or exterior decoration and landscape consultants
- Manufacturing components for lighting, air conditioning, ventilation, heating, power supply, drainage, sanitation, water supply or fire protection systems, or delivery any of these to site
- Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
- Extracting minerals and tunnelling, boring or construction of underground works for this purpose”
How To Prepare
With the 1st of October looming in the distance, it is important that you are prepared for the VAT reverse charge to enable continuous smooth running of your business’s cash flow and operations. You can prepare by:
- Investigating if the reverse charge will affect your sales or purchases
- Updating all your construction accounting software so it is current
- Analysing if the reverse charge will impact your cash flow
- Briefing employees who are liable for the VAT accounting operations so that they have knowledge on the reverse charge and the effects it may have
As a contractor you should review all your current contracts with subcontractors to ensure and check if the reverse charge applies to the services you receive. If it will, you need to let your suppliers know.
As a subcontractor it is important that you inform your customers of the VAT recharge and obtain their confirmation of these changes where they apply.
Don’t panic, you and or your business will continue to run smoothly if you are prepared! Be sure to check to see if the regulations apply to your business and familiarise yourself with the next steps for full compliance.
There is not a lot of information regarding the upcoming changes yet, however, as an EasyBuild customer, please be advised that all the necessary changes to subcontractor and supplier ledgers is underway.
Once development has been completed, there will be holding various webinars confirming the changes made to all our UK VAT registered customers.
Since the time of writing, the introduction date of the Domestic Reverse Charge VAT has been delayed by a year, coming into force on the 1st October 2020. These changes have been made within the blog.