Extensive VAT changes for the Construction Industry – Are you ready?

When the Chancellor Phillip Hammond announced measures to combat fraud in the construction industry, many would have pictured a joiner or plumber in their white van taking cash for jobs in suburban housing estates across the country. However, the target of the new Construction Reverse Charge couldn’t be further from that.

Aimed not at supplies to end users, the new measure, which come into force on 1 October 2019, seeks to change the VAT treatment of supplies between sub-contractor and the main contractor.

As with other domestic supplies of services, currently the sub-contractor is responsible for charging and accounting for VAT to HMRC on supplies of construction services. The main contractor pays the VAT and recovers this from HMRC. Provided that both the sub-contractor and main contractor are legitimate businesses, this process works. However, HMRC is concerned about the current levels of “missing trader fraud” in the sector. Under a missing trader scenario, the sub-contractor charges and collects the VAT due from their customer before disappearing without paying the VAT due over to HMRC.

The UK Tax legislation already provides for corporation tax avoidance in the construction industry through the Construction Industry scheme (CIS). Under CIS, where a contractor pays a subcontractor for construction services, unless the subcontractor is registered with HMRC, the contractor must withhold an amount of tax and pay this to HMRC.

Previously, therefore, we had the situation where sub-contractors not registered for CIS were not trusted to pay over corporation tax but permitted to collect 20% VAT on the same supplies.

To combat this potential missing trader fraud, HMRC propose to pass the responsibility for VAT accounting on to the customer. From 1 October 2019, the main contractor will be responsible for declaring the VAT on supplies received from the sub-contractor under the “reverse charge” rules. The main contractor will still be able to recover the self-assessed VAT under the normal rules.

This reverse charge will only apply to services between construction businesses rather than supplies made to the end-user. In addition, the new procedure will only apply where VAT is due at the standard or reduced rate; zero rated supplies will continue to be invoiced by the sub-contractor.

However, importantly for the North East, the new regime extends beyond what would be considered traditional construction businesses. As a result, many oil service companies that are currently required to apply the CIS rules, will also be caught by the new reverse charge for construction services.

A key challenge for businesses will be getting their systems and procedures in place to be able to deal with the new rules, particularly businesses that may, at different times, act as sub-contractors, main contractors or an end user.

As construction services can be subject to VAT at 0%, 5% or 20%, sub–contractors will need to have processes in place to understand if their customer is a main contractor or end user in order that they can ensure the correct VAT treatment is applied. In addition, where the VAT collected was previously used as working capital, as this will no longer be possible, sub-contractors will have to consider the cashflow impact of the change.

Main contractors, particularly those that use several sub-contractors, will need to ensure that they have a full understanding of the new rules to ensure that they apply the reverse charge appropriately.

End users, and any other business not caught by the new rules, will need to confirm their status to their suppliers and confirm that they are exempt from the construction reverse charge.

All businesses involved in the construction industry should review their existing supply chains to understand how they will be impacted by the new rules. Affected businesses will need to ensure that they have the necessary systems and controls in place prior to the 1 October 2019 implementation of the Construction Reverse Charge.

Alistair Duncan, Indirect Tax Director at Anderson Anderson & Brown LLP

For more information please contact Alistair Duncan (Alistair.duncan@aab.uk) or usual AAB contact. 

To find out more about Alistair and the VAT & Duty team click here.