The VAT reverse charge for construction services comes into effect from 1 October 2019 which is less than 4 months away. If you haven’t already done so, it’s time to prepare for this now! I’m sure you have got to grips with Making Tax Digital already and are up for a new challenge!!!
Domestic reverse charges operate similar to those for cross-border services and already exist in certain circumstances for domestic supplies in the UK (see VAT Notice 735). To counter fraud in the construction sector, these reverse charge provisions will be extended to supplies between contractors of construction services liable to VAT at either the standard or reduced rates. HMRC published a Guidance Note on the new provisions in November 2018.
From 1 October 2019, contractors charging other contractors for qualifying services will no longer be required to add VAT to their invoices. Instead they will notify their customer that they are liable to account for VAT on the total supply received (labour and materials). The legislation is designed so that if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge (see the mixed supplies section of the guidance notice). This is to make it simpler for both supplier and customer and to avoid the need to apportion or split out the supply.
So how do you show this on your invoices? When making a supply to which the domestic reverse charge applies, suppliers must show all the information normally required to be shown on a VAT invoice plus they must annotate the invoice to make clear that the domestic reverse charge applies (i.e. it must include the reference ‘reverse charge’) and that the customer is required to account for the VAT. The amount of VAT due under the domestic reverse charge should be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.
The next question is how do you reflect these transactions on your VAT returns? -
If you are a supplier of goods or services under the domestic reverse charge you must not enter in box 1 of the VAT Return any output tax on sales to which the domestic reverse charge applies but must enter the value of such sales in box 6.
If you are a customer, you must enter in box 1 of your VAT Return the output tax on purchases to which the domestic reverse charge applies but must not enter the value of such purchases in box 6. You may reclaim the input tax on your domestic reverse charge purchases in box 4 of your VAT Return and include the value of your purchases in box 7 in the normal way.
I’m guessing that the software companies will update their systems in order to account for these correctly!
The Revenue have provided the below flowchart which will assist you in deciding whether to apply normal VAT rules or the domestic reverse charge:
I guess your next question is “What is an end user?”. An end user is someone who receives building and construction services but does not supply those services on along with other building and construction services. This will include the end customer as well as “deemed contractors”.
The guidance note advises that, “because suppliers may be unaware they are supplying an end user, it will be up to the end user to make the supplier aware that they are an end user and that VAT should be charged in the normal way instead of being reverse charged. This should be in a written form that is clearly understood and can be retained for future reference. If the end user does not provide its supplier with confirmation of its end user status it will still be responsible for accounting for the reverse charge.” I can see this working for “deemed contractors” who are familiar with the CIS scheme however I’m not sure how this is going to work for the end customer. Are contractors going to have to ask every customer for a written form?
There are also a few other issues and complications that the notice does not address:
- These changes could have an adverse effect on the cash flow of smaller businesses who usually have up to 3 months to pay over the VAT collected on their sales;
- Similarly these smaller businesses, if their total income falls within the new rules, could end up in a VAT repayment position and should consider changing to monthly returns;
- And what about the VAT Flat Rate Scheme? If your total income falls within the new rules do you need to leave the scheme?
- If VAT is charged on a qualifying conversion at the reduced rate of 5%, is reverse charged all the way down the chain, and it subsequently transpires that it should have been charged at the standard rate of 20%, who is liable for this additional VAT?
These points are in desperate need of clarification from the Revenue. I’m sure they will publish further guidance before the implementation date however, if you need any assistance in the meantime please contact me.
Article by
Andrew Coney
020 3146 1602
Partner
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