New VAT rules for Construction Services from October 2019
HMRC have announced the introduction of a new reverse charge that will apply to all construction services from 1 October 2019.
The new rules do not have a lower threshold, and it is estimated that they will affect nearly 300,000 businesses, increasing their administrative burden.
The draft legislation is currently in consultation document with the consultation period closing on 20 July 2018.
So, who should be concerned about this change in VAT rules?
The new legislation is likely to be of most interest to sub-contractors and contractors providing supplies through the Construction Industry Scheme (CIS).
But what does it mean for tax payers?
Reverse charges are not always easy to get to grips with, but broadly speaking this new reverse charge will mean that –
1. Each business customer in any supply, or chain of supplies, of construction services will have to charge itself VAT on the cost of bought-in qualifying services and reclaim the same amount as input VAT (subject to normal rules and restrictions).
2. The supplier will only invoice and be paid the net value of the supply.
3. The business customer will pay the net value to the supplier and pay the VAT element direct to HMRC.
4. The final customer (either non-business or a private individual) will be charged VAT by the supplier in the normal way.
Who will the new rules apply to?
The new rules are likely to apply to a wide range of ‘construction services’ including alterations, extensions, repairs, demolition or dismantling of buildings or structures or supporting infrastructure (for example; roads, railways and waterways). It will also apply to painting and decorating.
However, the reverse charge will not apply to professional services such as those of architects, surveyors, structural engineers or the like.
So, why does HMRC feel we need these new construction related rules?
As with many of the tax changes in the construction industry the main reason behind the introduction of these new rules is the prevention of fraud.
Because it is essentially the customer accounting for VAT on the supply, those wishing to commit fraud will not be able to charge, collect or retain amounts of VAT that they should have paid to HMRC. The government estimates it will be able to save an average of £100m a year in lost revenue.
The new reverse charge is by no means unique. There have already been examples of successful reverse charge provisions being introduced in relation to mobile telephones, computer chips and emissions allowances.
Whilst the sentiment behind the introduction of these new rules is right, the fact is that it will create a significant new accounting burden for those businesses which are affected.
The final version of the legislation is expected to be published in October 2018, and in the meantime our advice is to start making preparations for this if you think this might affect you or your clients. Should you or your clients require any further assistance in this area, or in any other matters relating to VAT in the construction industry, please do contact us. You can also learn more about construction and property tax services here.