VAT changes due to affect the construction insdustry

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In the latest UK200Group blog post Paul Brown, partner at member firm Whittingham Riddell discusses the significant change in the way contractors and sub-contractors in the construction industry will account for VAT from 1 October 2019

On 1 October 2019 there will be a significant change in the way contractors and sub-contractors in the construction industry will account for VAT. From that date the Construction Services Domestic Reverse Charge (“CSDRC”) is introduced.

Paul Brown, Tax Partner continues: “Under the CSDRC, a person supplying certain construction industry services to a VAT-registered customer will no longer be required to account for VAT on those services. Instead the customer will account for VAT under a “reverse charge” arrangement – in effect the customer will account for VAT as if they had made the supply to themselves. They would then recover input tax in the same way as for any other supply.

The CSDRC applies only to supplies which would otherwise be subject to VAT at the standard or reduced rate. Supplies by non-VAT registered traders or zero rated supplies will not be affected.

The list of services that the CSDRC applies to is the same as those who fall under the Income Tax Construction Industry Scheme (“CIS”). They therefore include not only construction but also alteration or repair of buildings, some types of electrical and plumbing work, site clearance etc. The CSDRC also extends to any goods or materials supplied in conjunction with “construction services”.

The CSDRC applies only to services that are made to a contractor: it does not apply to an “end-user” customer. However, there may be situations when this rule may be relaxed where both parties agree. Further guidance is due to be published by HMRC in the coming months on this point.

Both contractors and suppliers will need to be clear about the impact of the CSDRC on their business and ensure they have the appropriate systems in place to deal with the new rules.

Subcontractors may suffer a cash flow disadvantage as they will no longer benefit from the potential delay between being paid the Vat on their invoices and accounting for that VAT on their VAT return.

There may be a cash flow advantage for Contractors who will no longer suffer a delay between paying VAT and recovering it, since both will now be dealt with on the same VAT return.

The onus will now be on the contractor to determine the correct VAT rate to be used for the reverse charge.
Before agreeing not to charge VAT on a taxable supply, a supplier of “construction services” will need to be satisfied that the supply falls within the CSDRC (and in particular that the customer is a VAT-registered contractor and not an end-user).

The CSDRC applies to “construction services”. The supplies which will be covered include:

• Construction, extension, demolition, alteration or repair of buildings or of any works forming part of the land
• Installation in any building (whether or not in the course of construction) of a heating, lighting, air conditioning, power, water, drainage etc system
• Internal cleaning of buildings (so far as carried out in the course of construction, extension, etc)
• Painting or decorating the internal or external surfaces of any building

It also applies to those services which form an integral part of any of the services described above or are preparatory to them or for rendering them complete.

Supplies which are excluded from the definition of construction services where supplied on their own include:

• Manufacture of components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
• Professional services of architects or surveyors, building consultants etc
• Installation of seating, blinds and shutters
• Installation of security systems such as burglar alarms, closed circuit television and public-address systems

In the first six months following implementation, HMRC will apply a light touch in dealing with errors, where businesses are genuinely trying to comply with the new legislation. However, where businesses knowingly fail to account for the reverse charge when it should have been due, penalties may be due.

We can work with you to determine how the CSDRC may apply to your business and, where applicable, to determine the changes which may be required to your systems to comply with the new rules. “

Whittingham Riddell tel: 01743 273273

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