VAT Domestic Reverse Charge – Building and Construction Sector
The Impact of the VAT Domestic Reverse Charge for the Construction Industry, and what it means for you
From 1st of October 2019, the UK will introduce VAT domestic reverse charges for building and construction services. The move aims at combating VAT fraud in the sector. Some of the areas that will experience a significant impact include cash flow and VAT compliance.
When individuals in the building and construction industry are buying supplies, they will be required to pay the VAT directly to HM Revenue and Customs instead of paying to the supplier.
The new rules do not affect supplies made to the end users, those between connected parties, and the ones between landlords and tenants. The laws are only applicable to persons and businesses registered for VAT in the UK who supply specified services as stipulated in the Construction Industry Scheme (CIS). Exemptions also apply in the cases where the service is zero-rated and where the customer is not registered for VAT in the United Kingdom. If you are not registered for VAT whereas you should be, why not register to speak to our team of Accountants who will be able to help immediately.
The reverse charge covers the construction services that fall within the CIS’ definition of construction operations. The broad definition includes services such as construction, extension, repair, alteration, and dismantling or demolition of buildings/structures or infrastructures like railways, waterways, and roads. Painting and decorating also fall under this category. Specified services are excluded from the domestic reverse charge, including the professional services of particular consultants, architects, and surveyors. Speak to a firm of Chartered Accountants if you are unsure about how this process works, our in-house VAT Accountants have been trained on DRC and will be able to guide you with the most reasonable solutions based on your situation.
The domestic reverse charge is not an entirely new phenomenon. It is already operational in certain goods and services like computer chips, mobile phones, and telecommunication services. The obligation of accounting for output VAT shifts from the supplier to the customer. The objective is to prevent the supplier from charging the customer what they purport to be VAT and later abscond with it and fail to deposit it to HMRC.
As such, from 1st of October 2019, every VAT registered firm/person in the UK receiving construction supplies from another VAT registered business/person will have to apply a domestic reverse charge and must account for the reverse charge on their VAT return. Such persons/businesses are eligible for the recovery of the same on that VAT return in accordance with the standard VAT recovery rules. Affected parties must be careful not to pay the VAT element to their suppliers where the reverse charge applies because HMRC will still hold them liable for the VAT payment. Avoid critical mistakes if you are registered for VAT by speaking to your accountant, make sure that they have implemented the correct solutions and have advised you on all possible scenarios. If your accounting firm is not prepared for DRC to speak to a specialist immediately as delays can result in errors and penalties.
The domestic reverse charge will be operational throughout the supply chain until it reaches the end user. The end user, in this case, means someone who will not make money (trade) from the construction supplies.
Controversy Surrounding Domestic Reverse Charge
The announcement by HMRC to implement DRC in the building and construction industry has been received with a lot of criticism. Provision of the detailed guidance has been long overdue, yet we are three months away from the execution date.
HMRC had explained to the industry players that there would be a lead time of one year (12 months). The people who will feel the most heat are major contractors and sub-contractors who have hundreds or thousands of live projects. Considering the amount of work requiring review, and the collation of the necessary information, that is quite a short timeframe.
Initially, the implementation date of domestic reverse charge had been set at six months following Brexit and VAT’s Making Tax Digital (MTD). However, the introduction of the reverse charge will almost coincide with Brexit and MTD’s date for deferred businesses. In that case, the domestic reverse charge brings the number of huge systems issues corresponding in October 2019 to three.
The other controversy originates from the details of the initial consultation. HMRC had proposed the implementation of DRC on labour only supplies within the building and construction industry, identifying it as the source of the VAT fraud that the move sought to target. It is now clear that the new rules will only apply to the provision of construction services, including materials. This means, exclusion of the employment businesses that supply staff. Concerned parties, therefore, question how the domestic reverse charge will satisfy the original policy intention of the HMRC.
Lastly, criticism has emanated from the publicity by HMRC on this rule for sub-contractors, and more so, those operating small businesses.
During consultations, the stakeholders requested the HMRC to avail warning announcements on VAT for Builders page on the UK’s government website. However, this may only apply to the existing law. The new guidance is neither readily available on gov.uk, nor the HMRC’s page for announcements. The question of whether smaller businesses will be ready by 1st October 2019 is only something that time can tell.
5 Quick Tips – If Domestic Reverse Charge is applicable to you:
- Implement company-wide processes to avoid paying VAT on supplies which come under DRC and for which the responsibility lies with the customer.
- Make sure your invoice templates are amended to properly account for DRC changes.
- If you are a large construction services company which provides a mix of services/products which are applicable to and exempt from DRC, make sure that all items are categorized correctly so as to cope with DRC requirements.
- Speak to your Online Accountants, Accounting Firm, Chartered Accountants, Tax Accountants or whatever type of professional you use to confirm if relevant processes have been put in place for your accounts to cope with DRC.
- Implement controls which will ensure that your VAT returns are compliant with the DRC changes and that any irregularities are picked up.
Clear House Accountants are specialist Accountants in London. We have developed our in-house specialist VAT Accounting team with state-of-the-art training and development to be prepared for all matters VAT related. We have effective strategies and solutions which will help you stay ahead of compliance and complicated regulatory requirements. Speak to us to learn more.
Anam has a degree in accounting from the Prestigious St John’s University, and works as a senior director in Clear House.
Before working in Clear House, Anam worked in various commercial roles, the last one being the VP Operations for a prestigious business organisation,working on improving the organisation’s operational efficiency, growth and high level client management.
Anam manages clients ranging from software companies to large property developers and managers. Notably, she recently worked with a large property development company building large scale developments in London and the surrounding area.