The domestic reverse charge is a major change to the way VAT is collected in the building and construction industry.
It will be introduced on the 1st October 2019, without a transitional period, and will have a significant impact on the accounting practices and cash flow of businesses in the construction sector. Here’s everything you need to know:
What is the VAT domestic reverse charge?
It’s effectively an extension of the Construction Industry Scheme (CIS) and applies only to transactions between VAT-registered contractors and sub-contractors who are registered for the CIS. The scheme means that those supplying construction services to a VAT-registered customer will no longer have to account for the VAT. Instead, the customer will account for the VAT.
In even simpler terms, for services they provide, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC. The payment received will be for the cost of the work done (plus materials used).
Why is it being introduced?
HMRC says it will combat fraud, whereby construction businesses charge VAT for the services they supply but then disappear without paying their VAT bill. By moving the VAT charge down the supply chain, HMRC intends to make this kind of fraud impossible.
Who does the VAT reverse charge for construction services apply to?
It applies only to VAT-registered businesses who are registered with the CIS, and use the CIS to report payments. So it applies to services supplied between the majority of construction sub-contractors and contractors in the UK. If your business is not VAT registered then the reverse charge cannot be applied to you, and standard VAT rules apply for the supplier.
What action should my business take before 1st October 2019?
- Check whether the reverse charge affects either your sales, purchases or both
- Make sure your accounting systems and software are updated to deal with the reverse charge
- Consider whether the change will have an impact on your cashflow
- Make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate