07 Mar What is the VAT reverse charge and why is it being introduced?
There will be a major change to the way VAT is reported in the Construction Industry Scheme (CIS) from October 1, 2019.
and subcontractors will no longer charge for construction services with VAT.
Instead, main contractors, their customers, would instead be given an invoice requiring them to self-account for the VAT which would otherwise be due.
Despite the fact HMRC doesn’t expect either main contractors or subcontractors will be worse off in the long run, there could be implications for cashflow for both types of business.
In fact, businesses along the whole supply chain should get ready to ensure a smooth transition.
What is the VAT reverse charge and why is it being introduced?
Two years ago, the UK government highlighted the problem of ‘carousel’ or ‘missing trader’ fraud in the construction industry which it says is costing the Exchequer £100 million every year.
This is when subcontractors provide workers for a project and charge their customer for the supply of people. The law says the cost of VAT must be added to it, but the cost to the subcontractor is paying the wages and that doesn’t attract any liability for VAT.
The subcontractor collects the VAT from their customer but does not pay it to HMRC and disappears.
It may be difficult to track them as the subcontractor may have been established to work on this single site and the government believes criminal gangs have been involved in the process.
The reverse charge system combats this problem. It shifts the responsibility for the reporting of VAT transactions from the seller of good or services to the buyer.
The recipient (of the goods or services) reports their purchase and the sale by the supplier in their VAT return. The declarations offset one other but this gives HMRC full visibility of the transactions.
The new charge affects standard and reduced rated supplies, as there can’t be any loss to HMRC where the supply doesn’t have VAT on it.
Some transactions will be excluded from the charge and so will supplies to ‘end users’ like developers.
What are the implications?
The charge applies to contractors supplying other contractors, so getting confirmation of the status of the customer to ensure the correct VAT treatment will become vital.
Contractors will also have to review the definition of labour carefully and scrutinise each different part of an invoice because if they pay more Vat than they should, they cannot recover this from HMRC. It has to come from the subcontractor.
There could also be cashflow problems for some businesses.
For example, in a construction service project with a value of £2m, the subcontractor would currently charge the customer £2.4m, then the subcontractor would pay the £400,000 to HMRC.
Some subcontractors could receive the £400,000 VAT before having to pay up to HMRC while some others would need to have invoice factoring of the £400,000 while they wait for payment. Add a reverse charge to that situation, and this would impact the first type of subcontractors negatively and the second positively.
There could also be cashflow differences in the cases of a main contractor which could make an input tax claim on a VAT return before having to pay the subcontractor, or those unable to do so.
What can you do to prepare for the VAT reverse charge?
- Make sure your VAT reporting systems are up to date and ensure your bookkeeper records and reports to HMRC monthly.
- Read up on the HMRC guidelines and examples here.
- Update your invoicing procedures.
Why Choose Balanced Up Bookkeeping to deal with your VAT under the CIS scheme?
- We are experienced at helping clients on the CIS and with VAT and have a client base of more 250 happy customers
- We issue monthly CIS certificates to all subcontractors.
- We report monthly to HMRC and record and report under the CIS scheme.
- We keep you in the loop at every stage, ensuring excellent communication
Do you need advice on implementing the VAT reverse charge for your construction business? Call us on 01633 439 002 or contact us here.