The way builders deal with VAT is changing for all VAT registered builders and contractors. It's called the VAT domestic reverse charge for construction services, and it begins on the 1st October 2019.
New VAT Rules for Builders from 1st October 2019
The way you need to deal with VAT is changing for VAT registered builders and contractors. It is called the VAT domestic reverse charge for construction services.
What you need to do differently?
If you’re not VAT registered there is no change. (You need to VAT register if your income for labour and materials is more than £85,000 a year) .
If you are VAT registered
There is no charge when paying sub-contractors who are not VAT-registered
There is no charge when buying materials
*New rules apply when paying sub-contractors who are VAT registered
*New rules apply when billing contractors who are VAT registered
When the subcontractor works for a contractor they will need to find out if the contractor is registered under the Construction Industry Scheme and if they are registered for VAT. If you have any doubts about the VAT registration being legitimate you can check the VAT number with the European Commission’s website
Currently, a builder charges VAT to their customer (the contractor), collects the VAT from the customer and accounts for it in their relevant VAT return (Box 1).
This is changing for supplies between VAT registered builders. The builder will invoice their builder customer (the contractor) without charging VAT and the builder customer makes the entry instead on their own VAT return (Box 1).
The builder receiving the services will not pay any more VAT than they do now because the same amount of VAT declared in Box 1 will also be included as input tax in Box 4: i.e. a nil effect overall. This is known as a “reverse charge” procedure.
What VAT rates does the VAT reverse charge for construction services apply to?
It applies to standard (20%) and reduced rate (5%) VAT supplies.
Reason for change
HMRC states that the aim is to combat VAT fraud, such as when construction businesses charge VAT for the services they supply but then disappear without paying their VAT bill – essentially taking with them a 5% or 20% additional profit that doesn’t belong to them (and very likely having provided the work at an uncompetitive and unfair discount because of this). HMRC states the construction industry is being targeted by organised criminals in this way.
These new procedures aim to prevent this from happening because the supplier has never paid VAT in the first place.
What you need to do next
As a subcontractor, when you issue your VAT invoice you are passing on the VAT charge that you would have had to account for in any event. You need to state the reverse charge applies on your invoice. We suggest “This invoice is subject to the reverse charge. Customer to pay the VAT of £_____ to HMRC”
This may mean that the subcontractor becomes “a repayment trader”, the VAT return being a refund from HMRC instead of a payment to HMRC.
What are the penalties levied by HMRC for errors?
HMRC guidance states that they will operate a “light touch penalty system” in the first six months up until 31 March 2020 over the interpretation of the new rules as long as you are aiming to comply and have acted in good faith.
HMRC has supplied a flow chart that you may find useful, which is attached to this email.
There is further detailed notes and guidance on the governments website.
If you have any questions or queries, we’d be happy to answer them for you so that you are ready for 1 October.
Send an email to firstname.lastname@example.org if you have any questions!