VAT Changes for Builders and Contractors

Changes for CIS Registered Businesses

HMRC are introducing a major change to accounting for VAT in the building and construction industry, from 1^st October 2019. This legislation is an attempt to stop “missing trader fraud”, where businesses having charged VAT on a job, then go missing, resulting in no VAT being paid to HMRC.

The new “domestic reverse charge” will come into effect when there is a supply of services between two VAT registered businesses that is currently reported under the Construction Industry Scheme (CIS).

The new rule will change the person responsible for charging VAT, with this moving from the subcontractor to the main contractor. This will apply to standard and reduced rate work, while zero rated jobs and some connected company transactions will be excluded.

Domestic reverse charge will include materials unlike CIS, which will continue to be reported on labour only.

How does it work?

From 1^st October 2019, for any transaction covered by the new regulations, a subcontractor will no longer charge VAT on their invoice, unless that business is the end user. If the contractor is also a subcontractor, they will follow the same rule.

The contractor will report the purchase invoice on their VAT return using reverse charge, resulting in them paying and reclaiming the VAT in the same period. Software companies are currently updating programs to allow for the changes being brought in.

Example

A Subcontractor does work for a Contractor on a standard VAT rated job. Both are VAT and CIS registered.

The Subcontractor invoices £10,000 with no VAT. On their VAT return the net sale will appear in box 6, but output VAT will be £NIL.

The Contractor, who is not the end customer, then completes their VAT return. Box 1 will include the £2,000 output VAT (nothing in Box 6), while Box 4 will include the £2,000 input VAT and Box 7 the net purchase value.

This will affect cash flow for many subcontractors as they are no longer receiving the VAT from the contractors. However, as their level of output VAT will be reduced, they may find themselves in a VAT repayment situation, and should consider if they wish to apply to submit monthly returns to accelerate refunds.

Any subcontractor using the VAT flat rate scheme should review whether this is still the best option.

Ongoing contracts, which continue over the 1^st October 2019 date need to be assessed. If over 5% of the contract would fall into the reverse charge regime, then the full contract should be treated that way.

HMRC advise that a “soft touch” will apply to any penalties for the first six months of the new legislation.

Gail Kristiansen is a Book Keeping Manager and can be contacted at gail.kristiansen@renniewelch.co.uk or 01573 224391