With effect from 1 October 2020, HMRC will be introducing significant changes to the VAT treatment of supplies within the construction industry. The UK tax authority will implement a new domestic reverse charge, brought in as a response to government concerns about organised criminal attacks on the VAT system, whereby tax bills have gone unpaid by construction businesses. The aim is to make this type of fraud unfeasible within the construction industry.
Standard and reduced VAT rate supplies will be affected in cases where payments are required to be reported through the Construction Industry Scheme.
What is changing?
At present, sub-contractors are responsible for charging and accounting for VAT to HMRC on supplies to main contractors. From 1 October 2020, it will be the main contractor’s responsibility to declare VAT on supplies from their sub-contractors under the new domestic reverse charge rules.
The main contractor will still be able to claim VAT as a deduction, subject to the normal rules of VAT recovery.
Who is affected?
These new rules will only affect supplies where the payments must be reported through the Construction Industry Scheme.
Services impacted by the domestic reverse charge will include:
- General construction services
- Repairs and maintenance
- Painting and decorating
- Demolition and site clearance.
There are some exclusions from the new rules, such as:
- Zero-rates supplies
- Certain specific supplies between connected parties
- Certain specific supplies between landlords and tenants
- Professional services provided by architects, surveyors and other professional advisors
- Installation of security systems, including burglar alarms, CCTV and public address systems.
The new rules only affect the supply of services between the main contractor and their sub-contractors if they are both VAT-registered businesses. As a result, the VAT treatment of supplies to the final customer (i.e. the site owner) should not be affected.
Where a sub-contractor has provided a mixture of supplies which fall both within and outside of the scope of the domestic reverse charge rules, then the whole supply will be subject to the domestic reverse charge. This is simpler for both the sub-contractor and the customer, as the supply does not have to be divided up or split out.
How can I prepare for domestic reverse charge changes?
We recommend that businesses involved in the construction industry review their supply chains and determine how they will be impacted. This will include checking if their contractors or sub-contractors are aware of the changes and their new responsibilities.
If you receive services from another contractor, it will be your reponsibility to determine which VAT rate applies and whether or not the services you received will be subject to this reverse charge.
How Prydis can help
If you think these changes might affect your construction business, please get in touch with your client manager to find out how Prydis can assist you.
Prydis has a strategic approach to managing the performance of your business, legal and financial affairs that stretches beyond standard advice. With our in-house expert lawyers, accountants and wealth managers, we can offer you assistance with everything from property investment to real estate legal advice.