VAT Construction Reverse Charge - the basics

7th May 2019

VAT rules for building contractors will change from 1 October 2019.


HMRC is changing the way in which building contractors will account for VAT on some of their supplies from 1 October 2019.


The change is likely to affect all businesses which make supplies in the construction industry and which fall within the Construction Industry Scheme for income tax, where their customer is also a supplier of construction services.


Reverse charge


“Reverse charge” VAT accounting will be introduced in order to avoid fraud within the supply chain for these services.


For affected supplies, the supplier will not charge VAT on their sales invoice to another VAT registered contractor, even where the supplies would have been subject to VAT at 5% or 20%, and the contractor receiving the invoice will instead account for VAT on their VAT return using the “reverse charge” procedure.


This involves accounting for output VAT in box 1 of the VAT return and then reclaiming it in box 4 on the basis that relates directly to taxable supplies.


Suppliers of affected services will need to decide whether or not their customer is an “end user” – VAT will continue to be charged as usual on all supplies to private individuals and also to business customers who will use the services themselves (for example repairs and maintenance to their own office building).


The change is likely to affect the cash flow of businesses which make or receive these supplies as they will no longer be making or receiving payments of VAT in advance of paying or reclaiming the VAT on a VAT return.


The specific impact will depend on the type of transactions concerned but all affected businesses should review the effect of the change on their working capital requirements.


A change to monthly VAT returns may be appropriate in some circumstances.


Future blogs will look at the implications of the reverse charge in more detail, but please contact us if you require further detail at this stage.


If you would like to discuss how these changes will impact on your business, please contact us.


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