Construction service reverse VAT charge – Are you ready for a disruptive time?

Less than 70% of Federation of Master Builders members are unaware of the new reverse charge VAT regime for construction services.

Executive summary

The Federation of Master Builders have released new data which confirms that fewer than 70% of its members know about the new reverse charge VAT regime for construction services that will be rolled out later this year.

When AC/DC famously sang about getting us all ready for a good time, they probably did not have VAT in mind. However, the construction industry needs an equally catchy tune so that everyone becomes aware of the change and its future commercial impact.

Details

From 1 October 2019, the reverse charge regime means that any VAT registered business receiving certain specified construction services for onward sale (essentially those services that fall within the Construction Industry Scheme) will now have to pay any VAT directly to HMRC. Contracts that include both services that fall within the reverse charge rules and services that fall outside will be subject to the reverse charge on the whole of the contract. This will affect certain construction services and any materials which are part of a single supply of services. Currently, the VAT is paid through the supplier’s invoice and that sum would be later passed onto HMRC therefore this change effectively ‘reverses’ the process. Furthermore, the liability and any subsequent financial penalties will now fall on the head of the recipient (rather than the supplier).

The reverse charge doesn’t apply to services supplied to between landlords and tenants or to the ‘end user’ (for example the property owner). It also doesn’t apply where the recipient is not registered (or required to be registered) for VAT or the Construction Industry Scheme or where the supplies in question are zero rated. It will therefore primarily affect supplies between contractors and sub-contractors. Recognising that determining whether the rules on a contract by contract basis may be time consuming, HMRC have indicated that if the reverse charge applies to more than 5% of contracts (by volume or value) with a sub-contractor the reverse charge will apply to all contracts with a particular sub-contractor. This approach may not however be welcomed by the sub-contractors.

This fundamental change, and the lack of knowledge around it, could mean that many in the construction industry will be caught unawares. There is the potential for disruption as firms change their administrative procedures (invoices for example make it clear that the reverse charge applies and the ‘customer’ is required to account for the VAT) as well as an impact on cash flow as many businesses use VAT as a working capital before it is handed over to HMRC. HMRC has published some guidance on the new complex rules, but it does not appear to have cleared up the confusion. Many are calling for the changes to be delayed, however at the moment the changes are still due to come into force this autumn.

Conclusion

We recommend that you seek VAT advice and decide whether the reverse charge will apply to you from the start of a project if it will straddle the October change. If the reverse charge does apply then appropriate steps need to be taken in advance of October to assess the impact (do payment terms need to be revised for example) and to incorporate the new VAT accounting and invoicing procedures.

If you have any questions or would like to know more about our legal update, please contact Natasha Frayne, Solicitor and the author of this update, on 0161 214 0515 or natasha.frayne@weightmans.com, or Tom Collins, Partner, on 0151 243 6939, or tom.collins@weightmans.com.

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