HMRC have now finalised the guidance and legislation in respect of the new domestic reverse charge for construction services which comes into force on 1 October 2019.
The new regime will require the recipient rather than the supplier to account for the VAT due on certain construction services – and it will have a significant impact on the accounting practices and cash flow of businesses in the construction industry.
From 1 October 2019, a VAT registered business which supplies specified construction services to another VAT registered business, will be required to issue a VAT invoice stating that the amounts invoiced are subject to the domestic reverse charge.
Afford Bond Cheshire Tax Director, Chris Regnauld said: “Importantly, it is the contractor/recipient that must account for the VAT due when submitting their own tax return and they will not be required to pay the VAT amount over to the supplier.
“The recipient will also recover the input VAT under normal rules and therefore the net VAT position will be neutral.”
HMRC have confirmed that the reverse charge services will not count towards the VAT registration threshold which is obviously excellent news for smaller businesses (SME’s). The new reverse charge will only apply to ‘specified services’ which are usually services that are defined as construction operations under the CIS rules. Some services will not fall within the scope of the domestic reverse charge.
However, where there is a reverse charge element in a supply then the whole supply may be subject to the domestic reverse charge. The domestic reverse charge will apply to specified services unless:
– The services are supplied to an end user, such as the property owner, or directly to a main contractor that sells or lets a newly completed building
– The recipient makes onward supplies of those construction services to a connected company
– The recipient is not VAT registered, or required to be VAT registered
– The recipient is not registered for the CIS
– The supplier and recipient are landlord and tenant or vice versa, or
– The supplies are zero-rated.
It is therefore important that construction businesses are prepared for the new regime well in advance of 1 October 2019 and fully review supplies made to and received from, other VAT registered businesses. Businesses should also consider whether or not adaptations are required to their accounting systems and if there are any ways to mitigate the potential cash flow position.
“As you can see,” said Chris Regnauld: “the new rules will impact on accounting systems and processes – including its general cash flow position – in any construction industry business.”
Cheshire Accountants Afford Bond have offices in Nantwich and Wilmslow and a team of fully qualified tax experts and accountants available to help you – for further information, please contact our Tax Director Chris.Regnauld@affordbond.com or complete the Contact Us form here on our website.