New Vat Rules For The Construction Industry
Just when you think you’ve finally gotten your head around the ins and outs of VAT, the rules change and you’ve got to start all over again. VAT may not be the most thrilling subject in the world, but it’s essential reading if it applies to your business.
If you’re in the construction industry, there are some important changes due to be rolled out in October 2019 about VAT and the way that it’s charged. HMRC have decided to introduce these rules to combat fraud and eliminate the opportunity to siphon off VAT. They represent an enormous change in the way VAT can be charged and claimed.
Not everyone will be affected; HMRC estimates around 150,000 businesses could be affected by these new rules. If you’re one of these, you’ll need to make sure you’ve made the changes in time for 1 October 2019 or else face a stiff penalty from HMRC for non-compliance.
The new rules are known as domestic reverse charge (DRC) but what does this mean for your construction business? We’ve put together a handy guide which breaks the new rules down step-by-step and includes exactly what you need to do now.
Why are the changes being made?
It might seem a bit pointless pondering on the reasons for the change, but understanding the logic behind HMRC’s new rules might help to understand the new process.
At present, the Treasury loses tens of millions of pounds every year in VAT from the construction industry due to a scam known as “missing trader fraud”. This involves a number of individuals taking advantage of the system as it’s currently set up.
The scam starts by buying zero-rated goods from an overseas country, which should then be liable to VAT once imported. The goods are sold from one trader to another with VAT being charged on the price but the VAT never being passed onto the government. The end business buyer who has paid VAT reclaims it from the government before moving the goods back overseas. In the meantime, the earlier businesses in the chain vanish, never paying the VAT which was owed.
This scam allows the VAT reclaim to be made without the revenue ever having been paid in the first place, leaving the Treasury out of pocket.
The domestic reverse charge aims to close this loophole, making it impossible to claim VAT which hasn’t been paid.
How will the domestic reverse charge work?
The change sounds fairly simple in theory but for businesses that it affects, there will need to be wholesale changes in their reporting.
In basic terms, rather than the supplier being liable to pay VAT, it’s now the buyer’s responsibility. They can reclaim VAT in the normal way, thereby moving payment and reclaim to the same individual. This allows HMRC to ensure that only VAT which has been paid can be reclaimed.
Construction businesses must therefore not charge for VAT from 1 October 2019 for services which would be covered by the HMRC construction industry scheme.
Who will this apply to?
The definition of construction is the same as that used by the construction industry scheme (CIS), as the reverse charge is tied tightly to the CIS. The only difference between the two is that the reverse charge will apply to the entire service, including materials.
There are some exclusions to the reverse charge, namely:
- Oil, natural gas and mineral extraction
- Site machinery and the delivery of such
- Architects, surveyors and landscape consultants within construction
- Artistic work such as murals and sculptures
- Signwriting and advertisements
- The installation of shutters, blinds and seating
- Installation of security systems such as closed-circuit TV and burglar alarms.
For a definitive list and the exact parameters which apply to each, refer to the government’s website.
What you will need to do
From 1 October onwards, if your construction business is affected by the reverse charge you will need to ensure your bookkeeping has been updated.
If you are invoicing a customer which CIS applies to, no VAT must be charged. Similarly, you will need to charge yourself VAT for receipt of any CIS-eligible services.
It will be essential to get these changes in place before from 1 October 2019, it won’t be possible to reclaim VAT that’s been paid elsewhere even if an error has occurred. This could leave some construction businesses seriously out of pocket and place a real financial strain on the business.
The software you use for VAT will need to be amended as per the following:
- When you’re the supplier, there must be no entry in Box 1 (relating to VAT on sales). This sales value should be shown in Box 6.
- Where you are the customer, you will need to ensure Box 1 is completed for any purchase which is subject to the reverse charge. The value of this purchase must not be entered into Box 6. The amount of VAT you are entitled to claim must be entered into Box 4.
The way you invoice consumers outside the CIS will remain unchanged.
The importance of getting it right
Although tens of thousands of construction businesses will be affected by these changes, HMRC expect everyone to have updated their accounting procedures in time for the 1 October 2019.
They have however promised to take a “light touch” with any construction business who makes an error within the first six months, providing they can demonstrate they have made every effort to comply with the new rules.
There is no definition of what this “light touch” is likely to be, so it’s strongly advisable to make sure your accounting and bookkeeping software has been updated in time to be compliant with the new rules.
Get a little expert help
If reading all of the above has left you with a headache, help is at hand. Here at Partner Accountancy, we’re happy to provide you with any support and advice you need to make sure you tick every box. Get in touch with us today and we’ll make sure your construction business is ready to meet the new rules by 1 October 2019.