04 October 2018
HMRC have published draft legislation which reveals details of how the reverse charge for the construction industry is going to work.
This draft will affect the construction sector and where the conditions are met, will see the recipients of construction services responsible for declaring output tax, rather than the supplier.
The rules are being implemented to tackle huge missing trader frauds in the sector.
The proposal involves the VAT registered business, which supplies "certain construction services" to another VAT registered business not charging VAT, instead the invoice states the customer is responsible for accounting for the VAT.
Under reverse charge, the recipient calculates the VAT and declares as output tax (a sale) in Box 1 of the VAT return and then reclaims the same as input tax (purchase) in Box 4 of the VAT return. If the recipient is partially exempt, then the input tax reclaimed in Box 4 is subject to a partial exemption calculation the recipient already operates, thus it is possible to reclaim less input tax than output declared.
The "certain construction services" are generally the same as under the Construction Industry Scheme (CIS) and the guidance indicates the reverse charge only applies where the recipient intends to make an onward supply of the same construction services, so this should exclude a builder building a property for a customer which the customer intends to occupy for their own purposes.
If not familiar with CIS, the kinds of services covered would be those relating to a typical building construction which includes demolition, alterations, conversions, repairs to land and property, installations of fixed equipment such as air conditioning units, general painting and decorating, site clearance, asbestos removal and such like.
To summarise, the new rules do not apply if the supply is between contractor and end customer or the recipient makes an onward supply of the building to a connected company and of course, where the supply is zero rated such as new dwellings.
The main impacts, if the conditions are met, could affect your cash flow potentially, getting to grips with processing invoices in a different way (both issuing and receipt of). What with Making Tax Digital (MTD) also coming on stream in April 2019, it is potentially a number of administrative and process issues that need sorting ahead of time.
Link to HMRC draft legislation :-
https://www.gov.uk/government/consultations/draft-legislation-vat-reverse-charge-for-construction-services
Don’t leave this to chance, so speak to your advisors or speak to us, our VAT advice is not as expensive as you think. VAT.tamworth@hwca.com
