Are you a VAT registered building contractor – perhaps working on various construction projects, including new build housing developments and new build commercial developments? Do you work sometimes as the main contractor and other times as a sub-contractor to another builder (eg an electrician)?
What are the main VAT changes scheduled for October 2020, as you may no longer have to charge VAT on your standard-rated services?
The intention to introduce a domestic reverse charge for construction services was announced in 2017. The change will shift the responsibility for accounting for the VAT on ‘specified services’ from the supplier on to the recipient of the supply. The change will be implemented into law via SI 2019/892, amending VATA1994 Section 55A. The reason for its introduction is to tackle Missing Trader intra-Community (MTIC) fraud.
The key features of the changes are:
- Only standard rated and reduced-rated supplies are affected by the changes. Zero-rated supplies are unaffected.
- The reverse charge will only be applicable on ‘specified services’ that fall under the reporting requirements of the Construction Industry Scheme (CIS).
- The reverse charge only affects ‘specified supplies’ made between VAT registered businesses.
- If your invoice consists of some CIS and some non-CIS supplies, your whole supply will be subject to the reverse charge.
- You will account for VAT in the normal way if you are making the supply directly to an ‘end user’ customer.
- Sub-contractors are likely to become VAT repayment traders.
Under certain circumstances you will not charge VAT on standard-rated or reduced-rated services.
This will be the case where you are making supplies as a sub-contractor to a VAT registered main contractor. As the main contractor will be making onward supplies of building and construction services to the developer or end customer, you are not supplying an end user, and therefore the domestic reverse charge will apply.
Work on new build dwellings which is zero-rated will be unaffected, whether you are a sub or main contractor.
When you act as the main contractor on a standard-rated or reduced-rated project, and you are supplying consumers or final customers of building and construction services, these supplies are not subject to the reverse charge, and you must charge and account for VAT in the normal way.
If you use the flat rate scheme, you should not include reverse charge supplies in your Flat Rate turnover. If a significant number of your supplies are subject to the reverse charge you may need to review whether it is still beneficial for you to remain on the scheme, as you will still be subject to the input tax restrictions of the scheme.
Should you receive any reverse charge supplies whilst on the flat rate scheme, again these should be dealt with outside the scheme, meaning you will account for the VAT to HMRC, but will be able to credit yourself with the input tax (as long as you are fully taxable).
Look out for further articles on this subject which we will be issuing over the coming months.
This tax Q&A was published in July 2019 – please be aware that the information above may have changed in subsequent months. This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice.
(This content was originally produced by Croner Taxwise Limited and is reproduced with their permission)