In a bid to tackle fraud in the construction industry, HMRC will be introducing a domestic reverse charge which will take effect from October 2020. The new legislation will only apply to certain building and construction services. It will mean that the customer will now be liable to account for the VAT in purchases rather than the supplier.
What is the VAT reverse charge?
The charge will be introduced in a new effort by the government to combat missing trader fraud. Missing trader fraud occurs when fraudsters set up construction companies, operate as normal construction companies but siphon off VAT as it moves up the supply chain. They will normally operate anywhere between six and nine months before closing the business and vanishing without paying HMRC any of the tax.
Although construction projects are a relatively new target for fraudsters, scams like these have been around for a while and started off in the electronic goods trade. But as governments crack down on other sectors they are forced to move to new industries.
The new reverse charge taxation system – due to be introduced from October 2020 – will mean that VAT cash will no longer flow between businesses. For every transaction that is made, the VAT will be registered and clearly stated on the invoice as a reverse charge. Rather than the supplier charging and accounting for the VAT, it is the recipient of those supplies who accounts for the VAT.
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Who will the VAT reverse charge affect?
Essentially any company that is registered with the Construction Industry Scheme (CIS), and any company that is invoicing a client that is not CIS-registered must charge VAT as normal. Contractors and sub-contractors who supply their services to larger contractors or work through a recruitment agency or umbrella company will mainly be affected.
What will the effects of the VAT reverse charge be?
Any recruitment agencies or CIS-registered contractors that pay other CIS-registered contractors will need to adjust their accounting systems in order to remain compliant. Larger organisations who employ large numbers of construction workers will need to be clear on where the reverse charge applies.
Smaller businesses who are reliant on VAT income moving up the supply chain may suffer financially as a result of the reverse charge. They will need to prepare for potential cashflow problems once the reverse charge is introduced.
Businesses that are caught by the reverse charge VAT will no longer charge VAT on their services; instead, the recipient will charge themselves VAT.
What specified construction services does the domestic reverse charge apply to?
The reverse charge only applies to supplies of specified construction services to other businesses in the construction sector. Below are a few examples:
- Painting or decorating the external or internal surface of any structure or building
- Installation of heating systems, air-conditioning, lighting, power supply, drainage, ventilation, water supply, sanitation and fire protection in any structure or building
- Construction, repair, extension, alteration, demolition and dismantling of structures or buildings (including offshore installations) whether they are permanent or not
Supplies that are excluded
There are supplies that are excluded from the reverse charge. Below are a few examples of supplies that are excluded:
- Professional work of surveyors, architects or consultants in the building
- Machinery and the delivery of the machinery to the site
- Drilling for the extraction of natural gas or oil
- Installation of security systems which include closed-circuit television and burglar alarms
Churchill Knight CIS can support you
Churchill Knight CIS provides a specialist payroll service for professionals working in the construction industry. Unlike an umbrella company, Churchill Knight CIS means you are able to keep your sole trader status; we will simply pay you your salary minus the correct deductions.
For more information about Churchill Knight CIS please visit our website. Alternatively, please schedule a call with us and a member of our team will be happy to answer any queries or go through the service with you.