HMRC delays new VAT rules for construction businesses
Despite the delay, in some cases the new regime should be accommodated in contracts entered into before 1 October 2020.
The domestic reverse charge (DRC) for construction services is no longer coming into force on 1 October 2019, but will be deferred for a year. The delay was announced amid concerns raised by industry representatives that some businesses in the construction sector are not ready to implement the DRC in time for next month. HMRC appears to have underestimated the impact the change will have on small businesses’ cashflow.
HMRC has explained that the delayed implementation is aimed at helping these businesses by giving them more time to prepare, and also avoids the new regime coinciding with Brexit.
What is the domestic reverse charge?
Normally, it is the supplier of goods or services that must charge VAT to the recipient and then pay the VAT collected over to HMRC. However, there are certain cases where it is the customer who must self-account for the VAT instead. This is referred to as a reverse charge. Generally, the reverse charge is used by HMRC to combat VAT fraud in certain sectors and that is the rationale for introducing it to the construction sector. Although the reverse charge reduces the likelihood of fraud in the supply chain, it also has a significant impact on businesses’ cashflow as they can no longer use VAT collected from clients to manage costs.
From 1 October 2020, the new DRC will apply to supplies of certain building and construction services together with any goods supplied with those services. The types of building and construction services covered by the reverse charge are broadly based on the definition of ‘construction operations’ used in the construction industry scheme (CIS) legislation.
However, the charge will only apply if:
both supplier and customer are VAT registered;
the standard or reduced rate applies to the supply; and
payment for the supply is required to be reported to HMRC through the CIS.
The DRC will not apply where:
the supply is zero-rated, e.g. construction of a new residential building;
the customer is an ‘end user’, i.e. a recipient who uses the building or construction services for themselves, rather than selling the services on as part of their own business; or
the supply is made to an intermediary and the intermediary is connected with the expected end user, e.g. if it is the end user’s parent or subsidiary.
Consequence of delayed implementation
Despite the delay, it will be appropriate in some cases to accommodate the new regime into contracts entered into before 1 October 2020. This is because the new rules will apply to all payments made after October 2020 regardless of when the relevant contract was entered into.
Some businesses will have already changed their invoices and billing processes to meet the needs of the DRC and cannot easily change them back in time. HMRC recognises this issue and has said that where genuine errors have occurred, it will take into account the fact that the DRC implementation date has changed.
As a result of the DRC, some businesses may find that, because they no longer pay 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 VAT returns to speed up payments due from HMRC. Some businesses may already have opted for monthly returns ahead of 1 October 2019. HMRC has said it expects these businesses to revert back to quarterly returns.
Sophie Walshe, Macfarlanes (sophie.walshe@macfarlanes.com)
Home >Articles > HMRC delays new VAT rules for construction businesses
HMRC delays new VAT rules for construction businesses
Despite the delay, in some cases the new regime should be accommodated in contracts entered into before 1 October 2020.
The domestic reverse charge (DRC) for construction services is no longer coming into force on 1 October 2019, but will be deferred for a year. The delay was announced amid concerns raised by industry representatives that some businesses in the construction sector are not ready to implement the DRC in time for next month. HMRC appears to have underestimated the impact the change will have on small businesses’ cashflow.
HMRC has explained that the delayed implementation is aimed at helping these businesses by giving them more time to prepare, and also avoids the new regime coinciding with Brexit.
What is the domestic reverse charge?
Normally, it is the supplier of goods or services that must charge VAT to the recipient and then pay the VAT collected over to HMRC. However, there are certain cases where it is the customer who must self-account for the VAT instead. This is referred to as a reverse charge. Generally, the reverse charge is used by HMRC to combat VAT fraud in certain sectors and that is the rationale for introducing it to the construction sector. Although the reverse charge reduces the likelihood of fraud in the supply chain, it also has a significant impact on businesses’ cashflow as they can no longer use VAT collected from clients to manage costs.
From 1 October 2020, the new DRC will apply to supplies of certain building and construction services together with any goods supplied with those services. The types of building and construction services covered by the reverse charge are broadly based on the definition of ‘construction operations’ used in the construction industry scheme (CIS) legislation.
However, the charge will only apply if:
both supplier and customer are VAT registered;
the standard or reduced rate applies to the supply; and
payment for the supply is required to be reported to HMRC through the CIS.
The DRC will not apply where:
the supply is zero-rated, e.g. construction of a new residential building;
the customer is an ‘end user’, i.e. a recipient who uses the building or construction services for themselves, rather than selling the services on as part of their own business; or
the supply is made to an intermediary and the intermediary is connected with the expected end user, e.g. if it is the end user’s parent or subsidiary.
Consequence of delayed implementation
Despite the delay, it will be appropriate in some cases to accommodate the new regime into contracts entered into before 1 October 2020. This is because the new rules will apply to all payments made after October 2020 regardless of when the relevant contract was entered into.
Some businesses will have already changed their invoices and billing processes to meet the needs of the DRC and cannot easily change them back in time. HMRC recognises this issue and has said that where genuine errors have occurred, it will take into account the fact that the DRC implementation date has changed.
As a result of the DRC, some businesses may find that, because they no longer pay 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 VAT returns to speed up payments due from HMRC. Some businesses may already have opted for monthly returns ahead of 1 October 2019. HMRC has said it expects these businesses to revert back to quarterly returns.
Sophie Walshe, Macfarlanes (sophie.walshe@macfarlanes.com)
