A new draft legislation has been published by the government outlining a new VAT reverse charge for certain building and construction services. The new legislation is designed to clamp down on missing trader fraud and will take effect from 1 October 2019.
Under the new rules, certain ‘specified services’, will hold the customer liable rather than the supplier to account for the VAT to HMRC in respect of the purchases. This ‘reverse charge’ will apply where payments are required to be reported through the Construction industry Scheme (CIS). It will apply through the supply chain up to the point where the customer receiving the supply is no longer a business which makes supplies of specified services (end user). The reverse charge will also include goods which are supplied with the specified services.
Businesses which supply specified services to a connected party, whether within a corporate group structure or with a common interest in land, will be excluded from the new rules and instead revert to normal VAT accounting rules.
Who is affected?
The changes will affect those offering construction services, based on the definition of ‘construction operations’ used in CIS. However, it will only apply to supplies where payments are required to be reported for CIS purposes. Therefore, unless the supplies are supplied to a contractor who is an end user, supplies between sub-contractors and contractors will be subject to the reverse charges.
Those where the supplier and customer are connected, such as a landlord and tenant, will be excluded from the new rules. Unlike CIS there will be no provisions where purchases become subject to reverse charge because the purchaser buys a certain amount of such purchases in a given period.
How will businesses be affected?
Due to the outlined changes, HMRC says that businesses will need to manage their cash flow differently and adapt their systems. HMRC have also stated that they are anticipating many errors initially as businesses adjust and will be lenient for the first 6 months after the introduction of the changes. However, businesses which knowingly claim end user status when the domestic reverse charge should have been applied will still be liable for the tax that should have been paid and may incur penalties.
Further Guidance
The changes to the legislation have been designed so that if there is a reverse charge element in a supply, then the whole supply will be subject to the reverse charge so as to make it simpler for suppliers and customers.
The guidance states that due to a supplier being unaware that they may be supplying to an end user, it is the responsibility of the end user to notify the supplier of this and VAT should be charged in the normal way. This should be in a written form and retained for future reference.
If your business may be affected by this and you would like any further information, then please contact us for more details.
