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Government delays the introduction of construction industry VAT changes

The government have announced that fundamental changes to the VAT system for businesses in the construction industry will now be effective from 1 October 2020. These changes would mean that businesses providing certain construction services to contractors would no longer charge VAT for those services. Instead the contractors would include both the output and input VAT in respect of those services on their own VAT returns (the “reverse charge”). Accounting systems for affected businesses will need to be updated to deal with the changes and for sub-contractors who are used to receiving payment some time before they account for the VAT the changes may have significant cash flow disadvantages. 

These changes were originally intended to come into force from 1 October 2019, so while this is good news for many businesses who were not ready for the changes this late decision is also a bit frustrating for those businesses who have spent time and money preparing themselves to deal with the new system.  Hopefully that effort will not be wasted when the changes do come in, and for those businesses who have dodged a bit of a bullet there is no time like the present to start preparing for the new system when it does eventually start!

What will change?

On 1 October 2020 there will be a significant change in the way contractors and sub-contractors in the construction industry will account for VAT.  From that date the Construction Services Domestic Reverse Charge (“CSDRC”) is introduced.

Under the CSDRC, a person supplying certain construction industry services to a VAT-registered customer will no longer be required to account for VAT on those services. Instead the customer will account for VAT under a “reverse charge” arrangement – in effect the customer will account for VAT as if they had made the supply to themselves.  They would then recover input tax in the same way as for any other supply.

The CSDRC applies only to supplies which would otherwise be subject to VAT at the standard or reduced rate. Supplies by non-VAT registered traders or zero rated supplies will not be affected.

The list of services that the CSDRC applies to is the same as those who fall under the Income Tax Construction Industry Scheme (“CIS”). They therefore include not only construction but also alteration or repair of buildings, some types of electrical and plumbing work, site clearance etc.  The CSDRC also extends to any goods or materials supplied in conjunction with “construction services”.

The CSDRC applies only to services that are made to a contractor: it does not apply to an “end-user” customer. However, there may be situations when this rule may be relaxed where both parties agree.  Further guidance is due to be published by HMRC in the coming months on this point.

Both contractors and suppliers will need to be clear about the impact of the CSDRC on their business and ensure they have the appropriate systems in place to deal with the new rules.

In the first six months following implementation, HMRC will apply a light touch in dealing with errors, where businesses are genuinely trying to comply with the new legislation. However, where businesses knowingly fail to account for the reverse charge when it should have been due, penalties may be due.

We can work with you to determine how the CSDRC may apply to your business and, where applicable, to determine the changes which may be required to your systems to comply with the new rules. 

Obviously, you now have more time to plan for this change, but we are advising our clients to make contact now to ensure that they are ready for the change when it comes in next year.  Please contact us if you would like to arrange a discussion as to how the rules will apply to you and how we can assist with the transition.

Call our Shrewsbury Office on 01743 273273 or email tax@wrllp.co.uk

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