In a complete overhaul of the way VAT is payable on building and construction invoices, the introduction of the domestic reverse charge from 1 October 2019 means that the customer receiving the service will have to pay the VAT owed straight to HMRC instead of paying the supplier if they report under the Construction Industry Scheme (CIS).
HMRC will operate a light touch penalty system in the first six months of operation to allow for initial implementation issues over interpretation of the new rules.
The sector will face major complications over the transition period, when all ongoing contracts will need to be reviewed to assess whether the reverse charge applies. There will also be implications to cash flow & accounts.
These changes will affect all individuals, sole traders and businesses registered for VAT in the UK if they report under the Construction Industry Scheme (CIS). It will not apply to individual consumers or final customers of building and construction services.
The reverse charge applies to the whole service whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content.
The reverse charge does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK.
There are a number of exemptions to the reverse charge rules, including architects, surveyors, interior and exterior decoration and landscape consultants, and security system installation engineers.
Monthly returns
As a result of the reverse charge some businesses may find that, because they no longer pay the VAT on some of their sales to HMRC, they become repayment traders (their VAT Return is a net claim from HMRC instead of a net payment).
Repayment traders can apply to move to monthly returns to speed up payments due from HMRC.
The best time to move to monthly returns will depend on the business and whether they want to have monthly returns from October, or to delay a little to offset some of the VAT they owe to HMRC on periods spanning 1 October.
If you think this will have an impact on you or your business or need any further advice please contact us.