A new ‘domestic reverse VAT charge’ will be introduced for certain supplies of construction services. The measure is being introduced to remove the opportunity for fraudsters to charge VAT and then not pay the VAT to HMRC. The rules will mean that the recipient rather than the supplier will account for the VAT due. The measure was announced in the Autumn Budget 2017, the draft legislation was unveiled recently and the legislation will come into effect on 1 October 2019.
Under the reverse charge system of accounting, which is currently used mainly for services received from outside the UK, the customer pays the VAT direct to HMRC on behalf of the supplier. The benefit of the system to HMRC is fairly obvious in that there are no amounts of output tax in the system which may not reach HMRC. The disadvantage will be for suppliers who will not have use of the output tax (in some cases for four months) before having to pay the tax to HMRC. In principle the rules will operate in the same way as the Construction Industry Scheme (with a supplier’s direct taxes being paid by the customer to HMRC).
The reverse charge will apply to what will be known as specified supplies. It will be applied through the supply chain to the point where the customer receiving the supply is not a business that itself makes supplies of construction services.
The types of construction services covered by the reverse charge are defined in the draft legislation and are based on the definition of construction operations used in the legislation for the Construction Industry Scheme.
The draft legislation excludes from the reverse charge:
- certain types of construction services, based on CIS definitions;
- construction services that are made to customers who are not construction businesses e.g. high street retailers;
- construction services supplied for the construction of new houses;
- supplies between connected parties; and
- supplies between landlords and tenants.
Where the reverse charge does not apply, suppliers will charge VAT in the normal way.
It is expected that following a consultation period closing date: 20 July 2018, HMRC will produce guidance in the form of a public notice or information sheet. It is hoped that the guidance will be comprehensive, as this will be a major change for the construction industry. It is likely that accounting systems will need to change and staff will have to be trained in the new accounting method. There will be complexities e.g. concerning VAT liability and as ever with VAT changes there will be winners and losers.
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