VAT and construction services – 1 October 2019 change
Background
On 1 October 2019 the law will change in relation to VAT and the provision of construction services.
From 1 October 2019 businesses who receive ‘specified’ construction services (see below) will have to account for VAT themselves, instead of paying VAT to their supplier as is the case now. This is known as the reverse charge. This will be a major change for the construction industry and is expected by HMRC to affect up to 150,000 businesses, which HM Revenue & Customs (HMRC) consider to, broadly, represent half of the sector in general.
The change is being introduced by HMRC to counter VAT fraud – for example businesses have been set up which have charged to and collected VAT from customers, but have not accounted for such VAT to HMRC (missing trader fraud). HMRC estimate that the change will allow them to collect an additional £100m in tax revenue.
What services are affected?
Although the final version of the legislation will not be published until October 2018, HMRC have recently released draft legislation.
The types of construction services which will fall within the reverse charge are widely drawn (influenced by the definition of construction services used for the purposes of the Construction Industry Scheme) and therefore includes services relating to construction, alteration, repair and demolition, along with painting and decorating. Certain services are excluded, such as those of architects and surveyors and some other consultants.
Will the change impact every scenario where construction services are supplied?
As a point of principle, yes – unless the construction services concerned fall within certain excepted scenarios.
If construction services are supplied to a business which is not in the construction industry and where the construction services are used for its own business, that business should not have to operate the reverse charge. For example, a high street retailer who is having works carried out to their business premises.
The majority of supplies between a landlord and tenant, and between parties who are connected for tax purposes, are expected to fall outside the reverse charge.
What steps should be taken by businesses who are likely to be affected by the change?
Such businesses should identify firstly whether they will actually be affected by the change.
They will then need to consider how having to operate the reverse charge will impact from a systems and process point-of-view. It is likely that existing accounting systems will have to be changed, along with reporting systems, to ensure that the operation of the reverse charge is accurately reflected on the relevant VAT returns. Relevant staff will also have to be trained to ensure that supplies falling within the reverse charge are correctly identified.
If you have any questions in relation to the reverse charge feel free to contact Michael Ridsdale.