Businesses which provide construction services are urged to make themselves aware of changes to the way VAT is charged prior to the introduction of reverse VAT charging later this year. Changes to VAT charging are being introduced in order to tackle the growing problem of VAT fraud in the construction industry. Tax preparation expert and director of DSR Tax Claims Ltd, David Redfern, cautioned construction contractors to be aware of the new reverse VAT charge coming into effect in October 2019 and to ensure that their businesses are prepared for any potential impact, with smaller businesses likely to be more significantly impacted.
In an attempt to combat the growing issue of VAT fraud within the construction industry supply chain, HMRC has introduced a change to VAT accounting rules. This means that businesses which supply certain construction services will no longer charge and account for the VAT on those supplies and services, with the responsibility for this shifting to the customer who will now be expected to account for the VAT. This will mean that VAT cash no longer flows between businesses within the construction supply chain. Redfern stated "Due to the growing number of construction businesses set up for purely fraudulent purposes, HMRC have introduced this new reverse VAT charge in order to reduce fraud and ensure that construction businesses remain compliant with VAT regulations. These changes mean that the recipient of the construction services and supplies will now be responsible for charging themselves the VAT and accounting for it and businesses which provide construction services will need to state clearly on their invoices that the VAT is subject to this reverse charge".
Contractors and sub-contractors who supply services to larger companies, recruitment companies and umbrella companies will be affected. The reverse charge will not apply to the consumer or final link in the supply chain, known as "end users" because there will be no onward supplier in that case. Redfern stated "Affected construction services are very similar to those which come under the Construction Industry Scheme (CIS), with professions such as surveying and architecture remaining out of scope for the reverse charge. In terms of charging, the main difference is that, unlike the CIS, materials are also included within the reverse VAT charge. However, this reverse charge won't apply to zero-rated services nor if the customer is not registered for VAT. While the VAT responsibility will shift to the customer, the good news is that this will not impact on the VAT registration threshold so smaller businesses needn't worry that these changes will push them within the scope of VAT registration".
Prior to the introduction of the charge, businesses within the construction industry are being urged to prepare. Providers of construction services and supplies will be required to check whether a customer is VAT-registered and whether they will be an "end user". Redfern stated "Before October, construction based businesses need to check whether they are going to be impacted by the reverse VAT charge. If so, accounting software and systems will need to be updated to ensure that they are compliant. Smaller businesses in particular may find that their cashflow is affected by this change, so precautionary measures need to be taken and staff need to be familiar with what is going to happen. HMRC has said that it intends to take a "light touch" towards errors made within the first six months of the charge being introduced as long as suppliers have made the errors in good faith and have attempted to comply - however, errors are far easier to rectify if they are spotted and picked up sooner rather than later". He added that some suppliers might find it useful to move to monthly returns rather than quarterly once the reverse VAT charge is introduced.
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