From the 1st October 2019 a new set of VAT rules specifically for the construction industry will be introduced.  The aim of the new “Construction Reverse Charge” is to cut down on fraud in the sector and will have quite wide ranging effects for businesses.

Under the new rules, the customer rather than the supplier will account for the VAT on the sale to HMRC.  The supplier will never receive the VAT from the customer, however the invoice will still need to show the implied VAT.
For example a VAT registered subcontractor who would, under the current rules, raise an invoice of £1,500 + VAT = £1,800 gross to a main contractor for work on an extension. Under the rules from 1 October 2019:

  • The subcontractor will send an invoice for £1,500 to the main contractor. The invoice will still need to show the implied VAT but the subcontractor will not put this VAT on their own VAT return or pay it over to HMRC.
  • The main contractor will pay the subcontractor £1,500 (rather than the £1,800 under the current rules)
  • The main contractor will add the £300 of VAT that needs to be paid to HMRC on the subcontractor’s sale onto their own VAT return as sales VAT.
  • The main contractor can then reclaim the £300 of implied VAT on their VAT return in the same way as normal.

The new rules will catch a broad range of construction services, it will also, and probably more importantly, affect cash-flow.
The rules only apply to services on which VAT would normally be charged.

Importantly, the Construction Reverse Charge does not apply to services to “End Users”.  This means that invoices to property owners, or to a business which plans to sell or rent out the building being worked on, won’t be caught by the new rules. There are also exemptions for sales between connected businesses, and supplies between a landlord and tenant.
The biggest burden will be on main contractors who use a lot of subcontractors, and on anyone who needs to confirm their eligibility as an End User.
More details will follow on this important topic, as HMRC provide further guidance. We will also provide specific advice to clients during the coming months.

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