The way VAT is charged on construction services will change in October 2019. HMRC has introduced the Domestic Reverse Charge (DRC) as part of new anti-fraud rules to combat VAT fraud in construction sector labour supply chains.
How will the new VAT Domestic Reverse Charge rules work?
If VAT is charged incorrectly by a sub-contractor, then HMRC may rule that it is not VAT that can be recovered by the contractor. This would create an actual VAT cost to the business. On top of this, penalties and interest charges could also be applied.
The new rules will be applied on the 1st October 2019. Supplies between contractors and sub-contractors (as defined by CIS) will be subject to the DRC. If the contractor is an end user, the DRC will not apply.
End users are recipients who will use the building services supplied for themselves, rather than resell those on as part of an ongoing supply chain. Reverse charge accounting is where the recipient of the services must self-account for VAT on the services received, rather than the supplying charging VAT on the services provided.
Things to note
* If you are on the flat rate scheme – you may need to leave before the 1st October 2019.
* HMRC will apply a light touch if an incorrect treatment will be applied in the first 6 months from the 1st October 19.
* Contracts already in place might need redrafting.
* Projects existing prior to the 1st October 19 will need split treatment if continuing post October
There could be a cashflow impact for subcontractors who have previously (legitimately) used VAT as a way to finance their working capital. Businesses that think they could be affected by this need to take steps now to plug any funding gaps that could arise post the 1st October. We can help you with this, either by reviewing your cashflow workings and models with you or by assisting you in looking for funding. It is also important that contractors understand and apply the reverse charge mechanism correctly.
Come the 1st October 2019, it won’t be possible for main contractors to reclaim input VAT from HMRC under the old rules, even if they’ve paid the VAT to the sub-contractor. Again, we can help by looking at your invoicing systems and at the way you prepare your VAT returns.