Businesses in the construction industry now have only a matter of weeks left to prepare for the new VAT domestic reverse charge regime.
These new rules will be enforced from 1 October 2019, significantly changing the VAT affairs and tax liabilities of companies in the construction industry.
The domestic VAT reverse charge will apply to all business-to-business supplies of services between VAT-registered businesses, where recipients make onward supplies of the same services within the construction industry.
The new rules are intended to prevent missing trader fraud, where a company effectively ceases trading before tax is due.
Where a reverse charge element exists within the supply chain then the whole supply chain will be subject to the domestic reverse charge, but it can also cover subsequent supplies where the domestic reverse charge has applied if parties are in agreement.
The new charge will not apply where:
- Services are supplied to the end user, such as the property owner;
- The main contractor sells a newly completed building to the customer;
- The recipient makes onward supplies of those construction services to a connected company;
- The supplier and recipient are landlord and tenant or vice versa; or
- The supplies are zero-rated.
Subcontractors in the same supply chain will have to be VAT-registered under the new rules, even where they do not meet the VAT registration threshold, and they will have to issue a VAT invoice highlighting which supplies are subject to a reverse charge.
This is an onerous change to the rules that is likely to affect a large number of construction workers and subcontractors who have previously not found themselves subject to the VAT regime.
Ensuring that VAT is not paid to a subcontractor under the reverse charging falls upon the main contractor, who should be able to recover the VAT, but this could mean that many smaller businesses face significant cashflow issues.
Contractors now need to clearly identify whether they are dealing with a customer as the reverse charge only applies between businesses in the construction supply chain and they must, therefore, charge VAT to the end customer.
As the changes under the VAT domestic reverse charge are wide-ranging and particularly complex it is important that construction firms start planning immediately.