Those working in the construction and building industry are being encouraged to get to grips with a new way of accounting for VAT.
Draft legislation, subject to consultation until 20 July, provides that from 1 October 2019 builders, contractors and other trades associated with the construction industry will have to change the way they invoice supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain.
Under the new Reverse Charge for construction services (RC) rules, a main contractor must account for the VAT on the services of any sub-contractor, while the supplier does not invoice for VAT.
It is then down to the customer (main contractor) to account for VAT on the net value of the supplier’s invoice and at the same time deduct that VAT – leaving a nil net tax position.
The complex new RC rules only apply to other construction businesses that then use them to make a further supply of building services, and not to end users, such as retailers, landlords or private individuals. The RC also does not apply to associated businesses.
Despite its title, the new legislation will apply to a wide range of services connected to the building trade, including:
- installation of heat, light, water and power systems
- painting and decorating
- erection of scaffolding
- civil engineering works
- associated site clearance
- foundation works.
The legislation also includes a list of exempted works and services, such as:
• professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
• drilling for, or extraction of, oil, natural gas or minerals, and tunnelling or boring, or construction of underground works, for this purpose
• manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to a site
• manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to a site
• signwriting and erecting, installing and repairing signboards and advertisements
• the installation of seating, blinds and shutters or the installation of security.
Introduced after a long initial consultation period, the recently released draft RC legislation, explanatory memorandum and tax information and impact note are designed to combat missing trader VAT fraud in the construction sector’s labour supply chains, which HM Revenue & Customs (HMRC) has identified as a significant risk to the public purse.
A major challenge for those working in the trade will be identifying which customers are liable for the RC. This will require businesses to check VAT registration numbers and obtain evidence that a customer is an ‘end user’ or not, so that if VAT is due it is invoiced correctly.
The change also risks creating cash flow difficulties for firms where cash is tight, as the contractor will hold the 20 per cent VAT until it needs to be paid to HMRC – it may be necessary to plan carefully for this.
This will create a significant new burden that many companies and sole traders may struggle with. Therefore, businesses affected by the new RC legislation are being encouraged to plan ahead to ensure that as suppliers they do not charge VAT incorrectly, or as recipients, they apply the RC correctly.
Failure to operate the RC correctly could lead to error penalties. Output VAT wrongly applied on an invoice will also be collected by HMRC, but will not be recoverable by the recipient.