Construction set for big VAT shake-up

Major changes to the way VAT is collected in the construction industry are set to come into effect from October 1 and they are likely to have a big impact on SMEs in the sector.

They need to act now to ensure their accounting systems and the way that they operate are ready for this latest tax shake-up.

It has been estimated that the new ‘domestic reverse charge’ rules could affect up to 150,000 businesses in the construction and building trade in the UK.

And there are fears that the change could hit the cash flow of sub-contractors in an industry that is already feeling the squeeze when it comes to payments.

Some businesses use the VAT they collect from customers as working capital before they pay it over to the HMRC. They will need to prepare for potential cash flow problems when the new rules come into effect.

It makes it really important that businesses look closely at their supply chain and their customers and determine how the change will affect them, and what they can do to minimise any impact.

The reverse charge will apply throughout the supply chain where payments are required to be reported through the Construction Industry Scheme (CIS).

It is expected that supplies between sub-contractors and main contractors will be most affected by the change.

At present a sub-contractor is responsible for charging and accounting for VAT to the taxman on supplies to main contractors.

Under the new reverse charge rules the main contractor will be responsible for declaring the VAT on supplies received from the sub-contractor.

An equivalent VAT deduction can also be claimed by the main contractor subject to the normal rules of VAT recovery.

The new rules apply only to certain building and construction services and to charges in the supply chain – not to end users.

The reverse charge will exclude businesses that supply specified services to connected parties within a corporate group structure or with a common interest in land. In these circumstances, the taxman says, the supplies in question will then revert to normal VAT accounting rules.

What it does mean is that VAT cash will no longer flow between businesses. For every transaction, the VAT will be registered and clearly stated on the invoice as a reverse charge.

Businesses which receive services from another contractor will need to determine which VAT rate applies and whether the services received will be subject to the charge.

HMRC says that it is introducing the new rules because of growing concern over the amount of “missing trader fraud” taking place.

The fraud involves a supplier issuing a VAT invoice and collecting the tax from their customer before going “missing” – without declaring the VAT to HMRC.

In a statement HMRC said: “VAT fraud in construction sector labour supply chains presents a significant risk to the Exchequer.

“Organised criminal gangs fraudulently take over or create shell companies to steal VAT whilst operating alongside actual construction services.”

To discuss how the construction industry domestic reverse charge for VAT could affect your business, or to talk about any aspect of VAT, please contact me on 01772 430000.