Construction sector VAT changes

From 1 October 2020 there are significant changes planned for VAT in the construction sector to help HMRC combat VAT fraud. These changes were originally planned to take effect in 2019 but were delayed due to the sector not being ready. WHAT IS CHANGING? From 1 October 2020 the way that VAT is accounted for on supplies of specified construction services will change. This is through the introduction of a reverse charge mechanism which means:

• The supplier of the services will no longer have to charge VAT where the services are supplied to another VAT registered business in the construction sector.
• Instead the customer will declare the VAT due as output tax on their own VAT return and reclaim it through the reverse charge mechanism.

WHAT SERVICES ARE IMPACTED? These VAT changes will impact subcontractors and contractors that fall within the scope of Construction Industry Scheme (CIS) who are VAT registered. It is estimated that these changes will impact up to 150,000 businesses nationally. The types of services impacted by these changes include:

• General construction
• Groundwork construction
• Renovations and maintenance
• Internal cleaning of buildings and structures (carried out in the course of their construction)
• Installations of heating, ventilation and air conditioning But this excludes:
• Sales to consumers not in the construction sector
• Building suppliers (e.g. plant and machinery, materials and equipment)
• Architectural services
• Security
• Signage

WHAT IS THE IMPACT? The greatest impact construction sector VAT changes will have is likely to be to the administration involved. Businesses will have to review their internal accounting processes and have greater dialogue with their suppliers/customers on the VAT treatment. It will also be important for businesses to maintain evidence to support the decision and minimise risk of VAT penalties. Businesses will also need to consider the impact of the changes on their cashflow. Whilst there is plenty of time until 1 October 2020 it is still a good idea to start your preparations early by checking your processes, speaking to your contacts and suppliers, and seeking assistance from your accountant if needed.