VAT News

VAT Update: Domestic Reverse Charge - Building and Construction Services

12.08.2019

The Construction Industry is starting to become aware of the planned implementation from 1 October 2019 of this significant change to the VAT accounting regime. There’s been an increasing level of calls for a delay in light of the wider pressures the Construction sector is facing from Brexit and other VAT regime changes such as the roll out of Making VAT Digital. However there is no indication currently of plans for a delay. What is this change all about therefore? Here’s an insight to the core areas that will be affected and what should be considered by any construction related business. For when VAT starts to get complicated like this Centurion is here to help.

The Basics:

Currently, where a supply is subject to VAT then it must be charged throughout the supply chain by suppliers of construction services.  A Domestic Reverse Charge (‘DRC’) will be effective from 1st October 2019 and will mean that many suppliers of construction services must no longer charge VAT but rather apply the DRC procedure.

The DRC will be introduced without a transitional period, however, HMRC have advised that it will apply a ‘light touch’ in the first 6 months.  

Under the DRC, the customer will account for VAT as if it had made the supply (to itself) and will also, subject to the normal rules, recover the same VAT as input tax.  The effect is, of course, to remove any risk that there may be deducted as input tax an amount which has never been paid over as output tax to HMRC.

The ‘construction services’ to which the DRC applies are the same as those to which the Construction Industry Scheme (“CIS”) applies. This includes construction, repair, extension, painting and decorating, demolition of buildings plus the installation of heating and lighting.

However, unlike the CIS, the DRC also applies to any goods or materials supplied in conjunction with “construction services” and if there is a reverse charge element in a supply then the whole supply will be subject to the DRC. 

In summary, the DRC will apply to construction services unless:

  • They are supplied to an End User, e.g. a property owner or directly to a main contractor that sells or lets a newly completed building

  • The recipient makes onward supplies of those construction services to a connected company (Intermediary Supplier)

  • The recipient is not VAT registered, nor required to be VAT registered

  • The recipient is not registered for the CIS

  • The supplier and recipient are landlord and tenant or vice versa, or

  • The supplies are zero-rated.

Actions to consider:

  • To what extent, if any, VAT cash flow be impacted particularly if you previously held/used VAT paid to you before passing it to HMRC.
     
  • Review supplies made to and received from other VAT registered contractors to establish which will be subject to the DRC.

  • Obtain notification from customers that they are an End User/Intermediary Supplier.  

  • Review your accounting systems so that supplies made under the DRC are entered correctly onto the VAT Return

Centurion VAT have specialist staff that can advise on the implications and help business plan for the changes. We can deliver training sessions for construction services technical teams to ensure they too are aware of how VAT will affect projects, invoicing and payments going forward. So if this issues starts to feel complicated then make contact – emailus@centurionvat.com

If  you would like to receive more articles like this and stay updated on the latest news, then sign up for our latest VAT Updates or email merle.bethell@centurionvat.com