On 1 October 2019, significant VAT changes are due to come into effect for the construction industry. The new legislation is designed to eradicate what HMRC regard as “missing trader fraud” within construction sector supply chains. The new legislation will require the main contractor rather than the subcontractor to account for the VAT due on certain construction services.
The New Rules
Under these new rules, businesses supplying construction services must not charge VAT on their invoices where their customer:
- Is registered for VAT; and
- Will use the services to make an onward supply of construction services.
Instead of the supplier charging VAT, the customer must self-account for VAT on the services received. This is known as the ‘reverse charge’.
Who Will Be Affected?
It has been estimated that from 1 October 2019, these changes will lead to major administrative changes for between 100,000 to 150,000 within the construction sector. The new rules will only apply to business to business transactions in which both businesses are VAT registered. This includes services for:
- General Construction: Construction, alteration, repair, extension, demolition or dismantling of buildings or structures;
- Renovations and Maintenance: Painting or decorating the internal or external surfaces of any building or structure;
- HVAC: Installation in any building or structure of systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;
- Cleaning: Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration.
Therefore, any company registered with the Construction Industry Scheme (CIS) and supplies construction services will be affected.
The Impact on Businesses
The primary consequence businesses must take into consideration, in addition to the administration, is the effect on cash flow. As a result of subcontractors not receiving the VAT from qualifying transactions, however they will still suffer CIS deductions and so their cash flow may deteriorate. However, they will not need to pay out the large quarterly VAT payments which can be difficult for these businesses to make. Indeed this is why HMRC are bring in these changes, as they are finding unacceptable levels of VAT not being paid back to them.
How Should I Prepare?
In October 2019, final legislation and guidance from HMRC is scheduled for issue, therefore giving businesses several months to prepare. Those businesses that will be affected should ensure they are fully up to date with the changes, such as knowing when the VAT should be charged, how and when a reverse charge is required. They should also look at the likely impact on their businesses cashflow and ensure they have made alternative arrangements.
A full review of supplies made to and received from other VAT registered contractors needs to be conducted well in advance of October 2019.
Although HMRC has suggested they will take a light approach for the first six months, if businesses are not prepared and do not attempt to implement these changes after this time, they will face penalties and interest
If you would like to discuss how the above changes could impact your business, please contact Ian Meaburn.