Construction Services – Reverse Charge – What cost to Housing Associations and their Development Companies?
As a means to addressing VAT at risk in the construction services sector from rogue firms who charge VAT on services, but then disappear before paying that VAT over to HMRC a “domestic reverse charge” has been under consideration for some time. After a period of consultation, the government plans to introduce this reverse charge from 1 October 2019.
The consultation process identified that businesses will need a long lead in time if they are to undertake the required adjustments to their accounting and IT systems. An important aspect of the new reverse charge will be that whilst there will be no threshold of value set for services which will trigger the reverse VAT charge, it will not affect sales to the final business or domestic consumer of construction services.
Draft legislation should be finalised by October 2018 so it’ll be important to keep abreast of the plans as they roll out.
What is a “reverse charge”?
To remove the risk of VAT being charged to customers on construction services but not passed over to the Revenue the application of a reverse charge in this sector will mean that the supplier does not charge VAT on the value of their sale. This removes the risk of that VAT disappearing. The supply still remains a taxable supply but the responsibility for the accounting of VAT on that supply moves from the supplier to their customer.
Clearly if the construction services qualify to be treated as zero rated – as being the services of construction of new dwellings, relevant residential or relevant charitable use new buildings then the reverse charge will not apply to that element. There will be areas to clarify where mixed supplies of zero, reduced and standard rated construction is being undertaken on a project.
We are awaiting the definition of what will be meant by the “final consumer” to identify who will need to take account of these changes. Currently it is our understanding that the impact will fall on charges from sub-contractors to the main contractor.
Once it is clear who is caught under these provisions then changes will be needed, to contracts, accounting and IT systems, to be able – in the main contractors accounts - to trigger the process of calculating the VAT due to be paid over on affected construction services which that contractor has bought in from a wide range of sub-contractors.
In sectors such as housing associations any VAT incurred by that body may not always be fully VAT recoverable due to the nature of income an association generates from renting out social housing. Whilst it is thought that the housing association itself would be regarded as the “final consumer” and not have to undertake the reverse charge it is more likely that the impact will fall on a Development Company established by the association, caught up, as they are, in the supply chain between subcontractors and the association as the “final consumer”.
With all that is planned for 2019 with Making VAT Digital this will form another system issue to manage through an organisation’s VAT accounting records.
It’s a topic area that will be covered at our VAT Forums in June for Housing Associations, Universities and Colleges so do book in to the relevant sector Forum to attend and learn more. VAT Forum Events
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