New VAT Rules for the Construction Industry

As of 1 October 2019, the government is changing the way it collects VAT from the construction industry. Known as “the domestic reverse charge” the new anti-fraud rule aims to combat VAT fraud in the construction industry. This is known as “missing trader fraud”.

How will the new rules for VAT on construction work?

Under the new regime, any VAT registered business which supplies construction services to another VAT registered business will now be required to issue an invoice stating that the service is subject to the domestic reverse charge. The recipient must account for the VAT due on their VAT return instead of paying the VAT amount to the supplier. The recipient may then recover that VAT as input tax.

Key points to remember about VAT on construction

  • After 1 October contractors will not be able to reclaim VAT input from HMRC under the old rules even if they have already paid VAT to the subcontractor.
  • This could impact the cash flow of subcontractors.
  • If you think you could be affected by this new rule, you need to take steps now to avoid being caught out come 1 October.
  • Unlike other types of reverse charges, the value of the reverse charge service will not count towards the VAT registration threshold.
  • Subcontractors will also need to confirm that they are working for a VAT registered business.
  • HMRC recognises that there may be difficulties around implementing the new rules and has announced that it will apply a light touch in dealing with related errors that occur in the first six months after introduction.
  • The reverse charges will not apply if: the supplies concerned are zero-rated, services are supplied to an “end user” for e.g. A property owner or directly to a main contractor that sells a newly completed building to a customer, the supplier and recipient are landlord and tenant or vice versa, etc.

So what do you need to do?

  • Review the supplies that you both send out and receive to establish what will be subject to reverse charges.
  • Find out from customers if they are an end user, and get details of their VAT and CIS status.
  • Make sure your accounting systems can deal with the change .
  • Consider the impact on cash flow and consider funding to cover any gaps.

If you require any help understanding or need support to prepare for the new domestic reverse charge, please get in contact with us here and we will be happy to help

When should I register for VAT?

You should register for VAT if:

  • Your VAT taxable turnover for the previous 12 months is more than £73,000 (the current VAT registration threshold)
  • You think your VAT taxable turnover will exceed the threshold in the next 30 days
  • You exceeded a VAT threshold at an earlier point in time and have not registered for VAT
  • You take over a VAT-registered business as a going concern