15th October, 2020, Melanie Harriss
Due to come into effect in October 2020 but now postponed (again) until 1 March 2021 the VAT domestic reverse charge for building and construction services will significantly change the way VAT is collected in the building and construction industry.
Already more commonly referred to as the domestic reverse charge (or the reverse charge), the new scheme will mean the customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier. It will only apply to individuals or businesses registered for VAT in the UK – not consumers.
How will it affect you?
This will affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS).
Those supplying construction services to a VAT-registered customer will no longer have to account for the VAT. Instead, the customer will account for the VAT (that is, it will be considered input tax for them, as if they’ve made the supply to themselves).
So, for services they provide, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC.
Why has it been introduced?
HMRC says it will combat fraud, whereby construction businesses charge VAT for the services they supply but then disappear without paying their VAT bill – essentially taking with them a 5% or 20% additional profit that doesn’t belong to them. By moving the VAT charge down the supply chain, HMRC intends to make this kind of fraud impossible.
The introduction follows the success of similar, although not identical, reverse charge schemes for the likes of mobile phone and computer chip retailers, and wholesale energy suppliers.
This is a big change to the way VAT is handled in the building and construction industry. If your business will be affected and you would like more guidance on this scheme, please get in touch.