What you need to know about the Reverse Charge VAT
The government has introduced a VAT domestic reverse charge for building and construction services with effect from 1 October 2019. Main contractors and subcontractors affected by the change need to understand what this means and to start preparing now.
The domestic reverse charge (DRC), as it is known, is not new but it is new to the construction sector and its impact is far reaching. It means that businesses in the construction supply chain will not be paid VAT on the services they supply. Their customer, the next contractor in the supply chain, will account for this VAT instead, as a DRC. The government estimates that between 100,000 and 150,000 companies will be affected.
Under this new procedure, VAT cash will no longer flow between businesses. With each business transaction, the VAT will be calculated as a paper exercise and registered on the invoice as a ‘reverse charge’. Only client-facing organisations at the top of the construction supply chain will be required to pay the tax.
As a general rule of thumb, any company that is registered with the Construction Industry Scheme (CIS) – HMRC’s construction-specific tax-collecting regime – will fall into the reverse charge category. Any company that is invoicing a client that is not CIS-registered must charge VAT.
For example:
A drylining contractor working for a main contractor on a commercial new-build site, will invoice for their work plus 20% VAT, but the contractor will not pay over the VAT. Instead, the main contractor will account for this VAT to HMRC, as a DRC, which means accounting for output tax (payable) and input tax (repayable) on the same VAT return, resulting in nil net tax due to HMRC./p>
This has several major implications: the first, that small and medium-sized businesses will no longer be able to rely on VAT money for cashflow; the second, that the onus will fall on major contractors to pay very large sums of money to the exchequer. And the third is that the whole of industry will need to get to grips with a new accounting system, or risk being mired in complex red tape. Potential accounting errors could push some organisations to unsustainable levels of debt.
The FIS has arranged a free to attend webinar on the 6th June 2019.
This webinar is free to attend, but pre-booking is essential – you can reserve your place here >.