VAT reverse charge for construction delayed for a year!
But how does it work?
If you’re in the building trade, you may have been dreading the introduction of the ‘domestic reverse charge for construction services’. In fact you may have done the very wise thing and spent a good amount of time preparing for it.
If so, we’ve good news and bad news.
The bad news is that it’s still going to go ahead. The good news is that the HMRC has delayed it for a year – so it won’t come into effect until 1 October 2020.
If you’re scratching your head and wondering what this is all about, then you may want to read on. The new charge will make major changes to how VAT is handled for certain kinds of construction services, along with the building materials used directly when providing them.
The taxman wants to introduce the new system to combat fraud. In a nutshell, it wants to stop subcontractors charging contractors VAT, only to disappear without paying the tax bill to HMRC. Apparently, this practice is something that organised criminals are very keen on exploiting.
How the reverse charge works
So, how will the reverse charge work? First, let’s look at the current system.
Say you are a self-employed bricklayer and you are subcontracted to work on a housebuilding project. You are VAT registered and so is the company that has contracted you.
At the moment, you would invoice your contractor for your services and any materials you have bought for the project, also charging them VAT at 5% or 20% as appropriate. So, if you provide services and goods that total £5,000, and which attract a VAT rate of 20%, you’d charge the contractor £1,000 VAT.
Under the new system, the responsibility for the VAT will move up the chain from you (as subcontractor) to your contractor. So you will charge them £5,000 and no VAT at all. However, you must specify the amount of VAT the contractor has to declare and pay (e.g. £1,000) also add the words “Reverse charge: customer to pay the VAT to HMRC” to your invoice.
When you do this, the contractor will account for and pay the VAT to the taxman.
When the charge applies
As always, the devil is in the detail. The charge applies only to VAT-registered businesses that are registered with CIS (i.e. they use the CIS to report payments). You can’t reverse the charge to a non-VAT-registered contractor either (rare as these will be), so you must bill these customers VAT in the normal way.
The charge doesn’t apply to services or goods provided to non-construction businesses either, so if you’re working directly for (say) a retailer or a property owner, then you will charge VAT as before.
What do I need to do?
At the moment, you don’t need to do anything until 1 October 2020, but it’s worth preparing for the change by talking it over with your accountant. This is particularly important if a large amount of your income comes from subcontracted work – because you will have to ask your contractors to pay VAT directly to HMRC, you may face cashflow problems (i.e. you can’t make use of the VAT income before you hand it over to the taxman).
If you are a contractor who employs subcontractors, the change won’t directly cost you anything extra. Using the example above, you’ll be paying £5,000 to your subcontractor and £1,000 direct to HMRC, instead of simply handing over £6,000 to the subcontractor. Your main worry between now and then is to make sure your accounting systems are ready for the change.