Construction changes to VAT *delayed*

In line with other similar changes in the tax system, HMRC have decided to delay the implementation of the VAT changes for the Construction industry by 12 months, after much pressure from the Federation of Master Builders (FMB), Federation of Small Businesses (FSB) and other business groups.

The Reverse Charges on VAT were due to come into effect from 1^st October 2019. However, it has now been delayed until at least 1^st October 2020.

This is good news for most in this sector, as it gives them more time to understand the changes and prepare for them, especially with other uncertainties in the marketplace, currently not helping the market conditions.

What were the proposed changes in the way construction VAT would change?

HMRC was introducing the domestic reverse charge, effective from 1^st October 2019. This would have changed the way VAT was charged for certain construction services and would have required a change of approach by those supplying and receiving certain goods subject to VAT. Those on flat-rate schemes would most likely find it best to transition to full rate scheme as part of this change.

The purpose of the change was to address the millions lost each year because of missing trader fraud. This is when businesses in the construction industry charge VAT to customers, but this doesn’t get declared to HMRC. It would also have meant that HMRC would have had less businesses to potentially investigate and manage.

How would the VAT domestic reverse charge have worked?

The new domestic reverse charge would have applied to the supply of specified services charged at the standard and reduced rate of VAT. This would have occurred between VAT registered businesses where goods and services are for onward sale. While the supplier would issue an invoice that states the service is subject to the reverse charge, it would have been the recipient who had to account for the VAT in their VAT return. They would then not pay the VAT to the supplier.

What services were included in the domestic reverse charge?

The new VAT rules would have applied to construction services, as defined in the Construction Industry Scheme (CIS), for example:

• Construction;
• Demolition;
• Repairs;
• Alterations;
• Installation of heating, lighting, water, air conditioning and drainage;
• Painting and decorating;
• Civil engineering works; and
• Scaffolding erectors.

This scheme would not have applied to:

• Zero rated supplies;
• Services supplied to an end user;
• Certain supplies between connected companies;
• Certain supplies between landlord and tenant;
• Architects, surveyors and other consultants; or
• Recipients that are not VAT registered.

If your work is not covered by the changes, such as professional services of architects, the way VAT was invoiced, was not proposed to change.

What actions should you take?

In all honesty, whilst in an ideal world you would get your head around the above, we would not recommend any direct action right now, especially as there is potential for further changes or delay. However, between three to six months before the planned changes, we would recommend that you:

• Ensure you fully understand the VAT changes;
• Review your supply chain to identify the services included and suppliers who may be subject to the reverse charge;
• Ensure your accounting software can adapt to the VAT requirements;
• Review your invoicing process; and
• Consider how you will complete your VAT reporting from October 2020, assuming no further changes in the timeline.

If you think you need further information to make sure you don’t get caught out by the VAT changes, to keep up to date, or to find out how our specialist tax team can help you, contact Black and White Chartered Certified Accountants today, or call us on 0800 140 4644.