Do you run a business operating in the construction or building sector? Do you supply or receive services that require you to be registered on the Construction Industry Scheme (CIS)?*
If you’ve answered these questions in the affirmative, yours is one of around 150,000 businesses which will be impacted by new legislation changing the way VAT is collected.
From 1st October 2019, the way VAT is accounted for on specified services is changing as the government closes opportunities for VAT fraud in the construction and building sector. In its current form, the system has been open to exploitation by organised criminals who’ve been able to set up fake businesses and ‘steal’ VAT– disappearing before they have to pay it over to the Exchequer.
The government announced its solution to the problem – the domestic reverse charge (reverse charge) back in the 2017 Autumn Budget, and it is coming into effect in just a few weeks’ time.
From 1st October, instead of suppliers charging and accounting for VAT, it becomes the responsibility of the recipient to account for and pay any VAT due to HMRC. (The new rules will only apply to individuals or businesses registered for VAT in the UK – and will exclude consumers).
Owners of CIS registered businesses need to understand how reverse charging works, what the implications are for their organisation, and what they need to do to be ready for 1st October.
At Inca, we have many businesses in the construction industry among our clients, and we’re dedicating both our August blogs to this topic. In this first part, we’re taking an overview of the new scheme, looking in brief at how it works and what services it will apply to.
How does the domestic reverse charge work?
The reverse charge will apply throughout the supply chain to any business providing construction supplies to another business.
Under the new rules, unless the business receiving the supplies can demonstrate that they are the final customer or ‘end-user,’ i.e. a business that does not make onward supplies of the building and construction services in question, but is registered for CIS, they will be responsible for reporting and paying the VAT – rather than the supplier.
What kind of services will be affected & exempted?
The reverse charge will apply to those supplies of building and construction services which also need to be reported under the CIS scheme.
Examples of services which will be subject to reverse charging include:
- construction, alteration or repair work to buildings or structures
- construction, alteration or repair work of any works forming part of the land, e.g. walls, roadworks, power lines & electronic communications equipment
- installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems
- internal cleaning of buildings & structures carried out in the course of their construction, alteration or repair
- painting or decorating the inside or the external surfaces of any building or structure
Examples of services which will be exempt from reverse charging include:
- the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration & landscape consultants
- signwriting & erecting, installing and repairing signboards & advertisements
- installing seating, blinds & shutters
- installing security systems, including burglar alarms, closed-circuit television & public address systems
Where materials are included within a service, the reverse charge applies to the whole service. The reverse charge does not apply in certain circumstances, including where a service is zero-rated, the customer is not registered for VAT in the UK, or where services are supplied to end-users or intermediaries connected with end-users.
What impact is the reverse charge likely to have on businesses?
The reverse charge is likely to have a significant impact on those businesses that are affected – particularly small and micro-enterprises. If this includes you, preparing for and administrating the new rules will require you to invest additional time and resources.
Ahead of 1st October 2019
You’ll need to familiarise yourself with the new rules and adapt your VAT accounting systems and processes so reverse charge supplies can be calculated and reported.
After 1st October 2019
You’ll need to allow additional time for calculating the reverse charge, record keeping, checking purchases are correctly treated and reporting reverse charge supplies on your VAT returns.
In some instances, the reverse charge will impact on cash flow. If your business uses the VAT you charge as working capital, this could present you with a short-term cash flow problem. As you will no longer be collecting VAT, you won’t be able to make use of the revenue during the period before you’re due to pay it to HMRC.
It’s possible too that your business may find that the consequence of removing VAT from some or all of your sales means your quarterly VAT return becomes a net claim instead of a net payment.
In our next blog post, we’ll consider what steps you need to take to make certain your business is fully prepared for the reverse charge.
*If you’d like more information about CIS and what kinds of businesses need to be registered, take a look at our blog ‘Should Your Business Be CIS Registered?’ Click here