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On 1 October 2019, HMRC will introduce a domestic reverse charge for construction services. This is being put in place to combat fraud in the construction services supply chain.

It’s crucial that you understand what you need to do and the implications that may arise as a result.

What is the Domestic Reverse Charge?

Under the domestic reverse charge, it will be the contractor’s responsibility to ensure that any VAT is applied correctly on the supplies it receives from its sub-contractors.

Where the revers charge applies, sub-contractors will no longer charge VAT to the main contractor or to another sub-contractor above them in the supply chain.

Who does the Domestic Reverse Charge apply to?

The reverse charge will apply to VAT registered building contractors, where they work with VAT registered sub-contractors.

Note that it will also apply to sub-contractors who work with others further down the supply chain.

The reverse charge, however, does not include the final customer (eg. occupier or developer). The final customer will continue to incur VAT at the appropriate rate from the contractor.

Which work falls under it?

The reverse charge will apply to construction services, but this excludes professional services of architects and surveyors.

Construction services are defined as construction, alteration, repair, extension or demolition of buildings and civil engineering works, installation of heating, lighting etc. This also includes painting or decorating the internal or external surfaces of any building or structure.

Electrical and plumbing work is not included, unless it’s part of a larger project.

What do you need to do?

Sub-contractors

As a sub-contractor, you can’t assume that the reverse charge applies and not charge VAT. You’ll need to review your current processes and see where you’ll need to make changes.

You need to do the following:

  • Confirm the contractor’s position before agreeing not to charge VAT
  • Obtain and confirm the validity of the contractor’s VAT number
  • Ensure invoices clearly state that the supplies are subject to the reverse charge

Contractors

As a contractor, you need to implement processes and procedures to ensure that VAT is not incorrectly paid to sub-contractors. If appropriate checks and controls aren’t in place, HMRC can refuse to input VAT recovery.

Consideration needs to be given to:

  • Agreeing with sub-contractors whether the reverse charge applies.
  • Where VAT is correctly charged – ensure you retain evidence to prove this.
  • Contracts – amendments may need to be made to cover the reverse charge where it applies
  • Where the reverse charge applies, the VAT needs to be accounted for through the VAT return.
  • VAT needs to continue to be charged at the appropriate rate to the final customer.

Cash-flow implications

Monthly VAT returns

Sub-contractors should review their VAT payment position, the business may move into a routine VAT repayment position.

Where this is the case, it might then make sense for you to submit VAT returns on a monthly basis. This approach should mitigate the need to fund the VAT incurred on costs for up to 3 months until it is repaid by HMRC once the quarterly VAT return has been submitted.

Flat rate scheme

Sub-contractors who use the Flat Rate Scheme could be severely disadvantaged as their output VAT is a fixed percentage of their income, whether or not VAT is charged to the customer.

You’ll need to consider whether to stop using the Flat Rate Scheme before 1 October 2019.

Where that is the case, Sub-contractors may still need to remain VAT registered and it may be necessary to account for VAT in the normal way.

To find out how the domestic reverse charge might affect you and your business, contact us today.

Find and contact your local Haines Watts office

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