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Important VAT Changes to the Construction Industry – Do Not Ignore!

12 June 2019
Gavin Hooker
Building & Construction, Accounting & Compliance

In the Government’s ongoing campaign to eliminate the effects of fraud, HMRC are bringing in new legislation from 1 October 2019 that will significantly affect the construction industry. This new legislation is the “Construction Reverse Charge”. The changes are major and if you provide labour in the construction industry then you will be impacted!

Background
This new legislation will be introduced to combat tax related fraud, which has increased over recent years. That is where fraudsters charge VAT to customers in addition to the services provided in the normal way. However, rather than flow the VAT money through the system such that this money is eventually received by HMRC, they keep it, usually by going bust and doing a runner with the money that should have gone to the Revenue. This issue is not specific to the construction industry, but the solution to this tax evasion is likely to have significant ramifications for businesses across the construction industry.

How does this affect me?
This legislation is best explained in an example:

Bob is a Subcontractor who is both VAT and CIS registered with HMRC. Bob provides labour and materials to his contractor, Fix It Limited. Normally, Bob would add VAT to his invoice and deduct CIS as follows:

Description Amount
(£)
Labour 1,000
Materials 500
Net amount 1,500
VAT @ 20% 300
CIS on labour @ 20% (200)
Total to pay 1,600

(We have assumed that the sale is Standard Rated for VAT and that Bob is a 20% CIS subcontractor)

Bob would account for the VAT on the sale on his next VAT return (£300) and pay this across to HMRC.

Fix It Limited would account for Bob’s VAT as a purchase invoice and reclaim the VAT on their next VAT return. They would also pay £1,600 to Bob as settlement of the invoice.

Under the new rules, Bob will not account for VAT on the labour and materials to Fix It Limited. Instead, Bob will notify Fix It Limited that this invoice falls under the reverse charge regime:

Description Amount
(£)
Labour 1,000
Materials 500
Net amount 1,500
VAT @ 20% 300
Reverse charge: S55A VATA 94 Applies (300)
CIS on labour @ 20% (200)
Total to pay 1,300

 

Fix It Limited will therefore need to account for the VAT on the sales invoice from Bob as both VAT on sales and VAT on purchases (in the above example, £300 will be added to box 1 and box 4). Effectively, Fix It Limited will not now reclaim the VAT from Bob and Bob’s VAT return will not show £300 in box 1.

Bob needs to state on his invoice to Fix It Limited that the sum of VAT appearing on the invoice must be accounted by them as output VAT. Fix It Limited will then pay the £1,300 to Bob for settlement of the invoice.

When Fix It Limited invoice the end client, this will be as a normal sale and Fix It Limited will charge VAT as normal and have to pay across the VAT on the sale to HMRC.

If Fix It Limited invoices another contractor then the construction reverse charge applies to him as well!

Whether you are a contractor or subcontractor, you will be impacted.

As you can see, Fix It Ltd has a cash-flow advantage, as he does not need to pay VAT to Bob. Bob however is now at a cash-flow disadvantage as he is unable to use the cash received for the VAT for the period up to when he pays it to HMRC. Bob is further disadvantaged if he has to pay VAT on expenditure as he will now probably be in a VAT repayment situation.

We have prepared a longer version of this article and are planning a series of seminars, which will be available exclusively to clients of Friend & Grant free by contacting us here. If you are not a client of Friend & Grant and are interested in finding out more about our services then please call us today.

The content in this blog is correct as at 11/06/2019. See terms and conditions.

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