From 1st October 2019, HMRC will introduce major VAT changes to the construction sector through the introduction of a reverse charge on construction services.
This impacts on the contractors and subcontractors in the construction industry scheme.
From this date there will be a significant change in the way that VAT is accounted for on supplies of specified construction services with the introduction of a reverse charge mechanism and this will have the following effect:
- The supplier of the services will no longer have to charge VAT at the appropriate reduced rate or standard rate of the tax where the services are supplied to another VAT registered business in the construction sector; and instead.
- The recipient of the services will have to account for VAT on the qualifying transactions by declaring the output tax on their value at the appropriate rate and claiming the input tax subject to the usual rules.
REASON FOR THE CHANGE
HMRC are introducing the measure as a way of fighting back against “missing trader fraud” where a supplier charges VAT on the supplies made but then disappears before paying this over to HMRC. The reverse charge procedure makes it impossible for the fraudulent activity to be undertaken because the responsibility for the VAT accounting is shifted away from the supplier to the customer, the recipient of the supply.
HMRC considers that this is an area where there is potential for there to be a significant tax loss.
The legislation sets out the construction services that are to be covered by these new rules and these include:
- Construction, alteration, repair, extension, demolition or dismantling of building or structures;
- Construction, alteration, repair, extension, demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines, electronic communications, 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 of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection 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;
- Painting or decorating the internal or external surfaces of any building or structure;
- Services which form part an integral part of, or are preparatory to, or are for rendering complete the services described above including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.
While the legislation also includes a summary of what HMRC does not see as construction services the list of the specified services is comprehensive and covers an extensive range of the activities undertaken in the sector.
THE IMPACT OF THE CHANGE
For contractors there are pros and cons in that they may have a greater control over the VAT treatment of the building work as far as reduced rating or standard rating is concerned and also cash flow savings because the VAT itself will not need to be paid to the sub-contractor. The drawbacks are that the VAT accounting becomes more complex and there is possibly a cash flow cost where under the previous rules the VAT paid on unpaid sub-contractors’ invoices could have been claimed before the invoice was settled.
The position for sub-contractors may be that they become ‘VAT repayment traders’ where they are continually in a VAT repayment position because their input tax claims exceed their output tax liability due to HMRC. In some cases this could mean that it would be beneficial to switch to monthly VAT returns.
It is important for both contractors and sub-contractors to be aware of the change and how it will affect their VAT accounting from 1 October 2019 as if transactions are treated incorrectly after that date there will be the usual tax and penalty implications.
Should you require any help or assistance with anything I’ve raised, please don’t hesitate to get in touch.