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VAT Reverse charge

What’s termed the VAT reverse charge, or ‘RC’, for construction services is changing. HMRC has released its first draft guidance and updated draft legislation but so far, the guidance that’s been issued lacks the much-needed detail. More information and clarification are expected.

The impact of this new ruling on businesses in the construction industry is likely to be significant. It will affect VAT-registered traders involved in the construction, alteration and repair of buildings including carpenters, electricians, plumbers, painters and air-conditioning companies.

Under the new regulations, a VAT-registered contractor supplying construction or building services and materials to another VAT-registered business will issue an invoice stating that works are subject to the reverse charge. Instead of paying VAT to the contractor or supplier, as now, the recipient will have to account for VAT for any building services reported under CIS regulations, on its own return, at the appropriate rate.

Whoever receives the invoice may be able to recover VAT as input tax, subject to the normal rules so that no VAT is due to HMRC. The reverse charge will not apply in certain circumstances. For example, it will not apply on a new build property when supplies are zero-rated, or where services are supplied between landlord and tenant.

What’s the impact on your construction business?

The onus will be on the contractor to verify the correct VAT rate to be used for the reverse charge. What this could mean in reality is that VAT-registered contractors and traders will need to take some extra steps to identify customers they trade with that could be liable to account for the VAT reverse charge. They will have to check they’ve any relevant VAT registration numbers for ‘customers’ and evidence that a customer is an ‘end user’ or not, so that VAT can be invoiced correctly. This new ruling could equally be a challenge for VAT-registered end-users who may not even be aware of the need to provide evidence so we can expect more guidance about that, as well as examples and clarification about any self-certification process.

This is quite a step-change in the way that VAT is charged across the construction industry and cannot be ignored. This new change is imminent, coming in before the ink has dried on Making Tax Digital for VAT. There’ll be a potential impact on MTD accounting software too so again, worth getting some sound advice.

If you’d like to find out how this could affect your construction business, and the steps you’ll need to take, we’re here to help.

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