Imposition of a domestic reverse charge on businesses buying and selling construction services
Who will be affected?
Businesses who are involved in the buying and selling of construction services.
When does it take effect?
The changes are expected to become law on 1 October 2019.
What is changing?
As of the implementation date, certain supplies of construction services will fall under the measure and will require the customer to account to HMRC for the VAT in respect of the transaction, rather than the usual position of the supplier accounting for the VAT. This will be achieved through the use of a reverse charge mechanism.
The reverse charge will apply through the supply chain where payments are required to be reported through the Construction Industry Scheme, or CIS. The reverse charge will apply until the point in the supply chain where the customer receiving the supply is no longer a business that makes a supply of a specified service, and is so deemed an end user.
Are there exceptions?
The reverse charge will not apply to zero-rated supplies of construction services. Equally, it will not apply to businesses that supply specified services to connected parties within a corporate group structure or with a common interest in land.
Actions Required
HMRC anticipate up to 150,000 businesses will be impacted by this change, and there are expected to be significant administrative burdens placed on the sector because of these changes. Businesses will need to familiarise themselves with the new rules, and potentially adapt their accounting systems and processes to allow reverse charge transactions to be identified, calculated, and reported.
Where a business is an end user it may need to tell its suppliers that it is an end user and, as such, the new reverse charge will not apply to them. This would be advisable to supply in writing.
Of particular note for smaller businesses in the supply chain, the move to reverse charge accounting will mean they no longer collect the VAT due and hold it on account for HMRC. We are aware that the majority of SMEs see such tax collection as part of their working capital, and so the loss of this cash flow may cause some businesses pain following the implementation of the new rules. HMRC has allowed a long lead in time for this measure so as to allow these businesses time to build up cash reserves and prepare for the changes.
Further Information
Should you wish to read more on this subject, HMRC’s guidance note can be accessed here, which expands on the above notes.
Further Queries
Please direct any further queries on this update to a member of the Indirect Taxes team.