Changes to VAT system in construction October 2019. Major changes to VAT in the construction industry can lead to serious cashflow issues for your small business.
The new VAT reverse charge rules will apply to specified construction services from 1st October 2019.
Put simply, if you are a VAT registered business supplying services under the construction industry scheme (CIS) to another VAT registered CIS business you will no longer receive VAT on top of your invoice unless you are invoicing the end user.
The changes to VAT system in construction October 2019 are being brought in by HMRC in an attempt to tackle the £100m annual VAT losses from ‘missing trader fraud’
How can I prepare before October?
If you think your services will be affected by the introduction of the reverse charge VAT, it’s important to make changes and understand the day to day impact this will have on your business to avoid penalties and being out of pocket.
As a business you should consider working with a specialist construction accountant who can:
- Help determine when the VAT reversal will or won’t apply to a project you work on
- Help forecast your cashflow to reduce the impact of the change
- File your new VAT returns correctly
- Raise your invoices in the correct new format
- Look at options for monthly VAT returns so you can claim VAT back on costs much faster
Reviewing supplies to existing clients
Establish whether the supply of services to your existing VAT registered clients would be subject to the new VAT reversal rules after the 1st October 19.
Consider funding solutions
With cashflow being one of the biggest implications of the change, it is worth considering options such as VAT funding or invoice finance to help pay for your outgoing costs whilst waiting for invoices to be paid by clients.
Negotiate shorter payment terms
Shortening the length of time customers have to pay for your services will improve the cashflow of your business.
What happens if I get it wrong?
HMRC acknowledges that the changes to VAT system in construction October 2019 will be significant for everybody across the industry, especially small businesses who will be the most heavily impacted.
HMRC will operate a light touch for genuine compliance mistakes within the first six-month period. Penalties will only be considered in this period if someone is deliberately taking advantage of the new measure.
It will be the responsibility of the customer to inform you, the supplier, if they are the end user or not so that you can determine if the VAT reversal applies.
What is the VAT reverse charge for construction services?
The VAT reverse charge will come into effect across the UK in October 2019 and has been introduced by the government to combat missing trader fraud.
The new taxation charge will mean that VAT cash will no longer flow between construction businesses. Come October, for every transaction that is made, the VAT will be registered and stated on the invoice as a reverse charge.
This means that rather than the supplier charging and accounting for the VAT, it will be the customer of the supplies who will hold the VAT and pay this over to HMRC on their return.
Will my construction business be affected by reverse charge VAT?
The reverse VAT charge will apply to the same range of construction services between VAT registered businesses that are covered by the Construction Industry Scheme and where the customer makes an onward supply of the same construction services.
For example, an office block needs a fit out. The person who owns the building is the end user. They engage with a main contractor for the work. You are the electrical firm who is brought in, by the main contractor, to fit the lighting on the project. Because you are supplying a construction service to the main contractor, who isn’t the end user in this case, the reverse charge will apply, and you will no longer receive VAT on top of the value of your services. Instead, the main contractor will hold the VAT money and pay this to HMRC on their VAT return.
How will the reverse charge affect business?
Any VAT-registered contractor that pays another VAT-registered contractor will need to adjust their accounting systems to include a VAT reversal code on all invoices in order to remain compliant.
Small businesses who are reliant on VAT income moving up the supply chain may suffer financially as a result of the reverse charge. Many businesses currently rely on the additional 20% as working capital before paying it over to HMRC on their quarterly VAT return.
It is vital that businesses prepare for potential cashflow issues way in advance of when the reverse charge is introduced.
How will it work?
Which services are affected by the reverse charge?
The reverse charge only applies to supplies of specific construction services to other businesses in the construction sector. A few examples include:
- Installation of heating systems, air-conditioning, lighting, power supply, drainage, ventilation, water supply, sanitation and fire protection in any structure or building.
- Painting or decorating the external or internal surface of any structure or building.
- Construction, repair, extension, alteration, demolition and dismantling of structures or buildings (including offshore installations) whether they are permanent or not
Which services are excluded from the reverse charge?
Certain supplies are excluded from the reverse charge, they include:
- Professional work of surveyors, architects or consultants
- Machinery and the delivery of the machinery to a building site
- Drilling for the extraction of natural gas or oil
- The supply of staff or workers (including that of an employment agency)
The original blog post was created by the construction industry experts at Exchequer Accountancy who can help you through these VAT changes to ensure that the day to day running of your business remains the same. They allowed us to use the blog post so we can inform you of the important changes. You can read the HMRC guidance on the October VAT changes in construction here.