New VAT rules for construction, repair and maintenance services
HMRC estimate up to 150,000 businesses will be affected.
From Tuesday 1 October 2019 some customers receiving building and construction services will have to self-account for VAT rather than being charged VAT by their supplier.
What happens now?
Currently, a VAT registered UK supplier providing construction services to a UK customer has to:
- decide what rate of VAT their services are subject to (0%, 5% or 20%)
- charge VAT to their customer on their invoice
- pay the VAT to HMRC.
What will change?
As of Tuesday 1 October 2019 a VAT ‘domestic reverse charge’ will come into effect on certain construction supplies.
Under the domestic reverse charge, the responsibility for accounting and paying the VAT shifts from the supplier to the customer. The customer has to ‘self-account’ for VAT on their VAT return and will be able to recover the VAT subject to their usual VAT recovery position.
Affected services
From 1 October 2019 the default position for a supplier providing construction services will be to not charge their customer VAT where:- the customer is VAT registered
- the customer applies the Construction Industry Scheme (CIS)
- the customer is not treated as an ‘end user’.
The type of services which can fall within the domestic reverse charge is therefore wide, and not just limited to ‘construction’ as it includes extension, alteration, repair, painting and decorating. HMRC has provided lists of the services they consider are impacted and those which are not. The VAT rules will be closely aligned to the CIS regime but with an important difference; where materials are included within a service, the VAT reverse charge applies to the whole charge. Whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials element.
While it is the customer’s responsibility to account for VAT, the supplier will still have to determine how much VAT is due on their supply. They will also need to notify the customer it is their obligation to account for the VAT.
Risk areas
Cash flow for some businesses may be affected by the domestic reverse charge. It is common within the sector for VAT receipts to be used as working capital. Businesses reliant on VAT for cash flow should review their financing arrangements and may also wish to consider switching to monthly VAT returns to accelerate VAT recovery.
Applying the correct VAT rate to construction services can also be complex. Different rates of VAT are chargeable on construction services depending on the nature of the works being undertaken, the type of property and the status of the customer. Suppliers will need to have a process in place to assess whether or not the domestic reverse charge will apply when invoicing their customers.
Similarly, the recipients who are self-accounting for VAT will need to ensure they have all the information they need in order to report VAT correctly on their return to minimise both the risk of VAT leakage and VAT liabilities.
Suppliers and recipients should also be aware that there are special rules to be applied for projects that span the 1 October implementation date.
How Crowe can help
HMRC published updated guidance on Friday 7 June 2019 which stated there will be a light touch approach for the first six months of implementation. However, with the continuing uncertainty around Brexit, and the recent introduction of Making Tax Digital impacting the sector, we recommend businesses take action to ensure they are ready and compliant for the domestic reverse charge from Tuesday 1 October 2019.
We can assist businesses with:
- reviewing which supplies they receive and/or make which will be subject to the domestic reverse charge, including those that span the implementation date
- discussions with your suppliers and customers about how the VAT changes impact your arrangements
- advising on the practical steps which need to be taken to be compliant such as invoicing requirements and VAT reporting obligations
- advising on how to account for the domestic reverse charge in particular where authenticated receipts or self-billing arrangements are in place
- assessing whether moving to a monthly rather quarterly VAT return submission may be beneficial and assisting you in changing your VAT return stagger.
