Delayed: Domestic reverse VAT charge for building and construction services

The Government have announced a 12 month delay to the introduction of the Domestic reverse VAT charge for building and construction services, stating industry concerns and the uncertainty of Brexit are key reasons for the decision.

About the VAT Reverse Charge

The Domestic reverse VAT charge for building and construction services was due to come into effect from 1st October 2019. There had been a long introduction of the legislation, with the introduction of the anti-fraud measure first being confirmed at the 2017 autumn budget, and the final legislation being published in November 2018.

The reverse charge system means that the suppliers of goods or services will no longer be involved in the payment of VAT to HMRC.

This change is designed to help tackle the issue of VAT fraud, particularly in instances where the contractor pays the sub-contractor the chargeable price plus VAT, but the subcontractor fails to account for the VAT to HMRC.

It means that the customer of the construction services will be required to account for the VAT, rather than the supplier, by showing the VAT as output tax on their tax return and reclaim it via the reverse charge mechanism.

These changes will affect construction firms that are currently covered by the CIS (Construction Industry Scheme). It only affects B2B provision of services between VAT registered businesses, where the recipient then makes an onward supply of the same construction services.

When will the VAT Reverse Charge come into effect?

The Government have recently announced that the introduction of the Domestic reverse VAT charge for building and construction services will be delayed for 12 months. This means that it will now come into effect from 1st October 2020.

Reasons for the delay

The Government have stated that industry experts do not believe the whole industry is ready to implement the changes in time for 1st October 2019.

To help these businesses, the introduction of the reverse charge has been delayed for a period of 12 months, until 1st October 2020. This also avoids any changes coinciding with Brexit.

What it means for construction businesses?

Construction businesses should continue to prepare for the introduction of the Domestic reverse VAT charge for building and construction services. However, they now have more time to ensure that all bases are covered. There are many ways that businesses can prepare. HMRC recommend the following:

  • checking whether the reverse charge affects either your sales, purchases or both
  • making sure your accounting systems and software are updated to deal with the reverse charge
  • considering whether the change will have an impact on your cash flow and making plans for this
  • making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

Contractors should also review sub-contractor contracts, to see whether the VAT reverse charge applies to the services you receive within these contracts. If it will, you should notify your suppliers to put in place appropriate measures.

Sub-contractors should contact customers to gain confirmation of whether or not the reverse charge applies. This should include confirming whether the customer is the end user or intermediary supplier.

Learn more about the Domestic reverse VAT charge for building and construction services, and how you can prepare, on the HMRC website, by clicking here.

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