Major changes to VAT in the construction industry can lead to serious cashflow issues for your small business.
The new VAT reverse charge rules will apply to specified construction services from 1st October 2019.
Put simply, if you are a VAT registered business supplying services under the construction industry scheme to another VAT registered CIS business you will no longer receive VAT on top of your invoice unless you are invoicing the end user.
The change is being brought in by HMRC in an attempt to tackle the £100m annual VAT losses from ‘missing trader fraud’
If you think your services will be affected by the introduction of the reverse charge VAT, it’s important to make changes and understand the day to day impact this will have on your business to avoid penalties and being out of pocket.
As a business you should consider working with a specialist construction accountant who can:
Establish whether the supply of services to your existing VAT registered clients would be subject to the new VAT reversal rules after the 1st October 19.
With cashflow being one of the biggest implications of the change, it is worth considering options such as VAT funding or invoice finance to help pay for your outgoing costs whilst waiting for invoices to be paid by clients.
Shortening the length of time customers have to pay for your services will improve the cashflow of your business.
HMRC acknowledges that the changes that will come into play in October will be significant for everybody across the industry, especially small businesses who will be the most heavily impacted.
HMRC will operate a light touch for genuine compliance mistakes within the first six-month period. Penalties will only be considered in this period if someone is deliberately taking advantage of the new measure.
It will be the responsibility of the customer to inform you, the supplier, if they are the end user or not so that you can determine if the VAT reversal applies.
The VAT reverse charge will come into effect across the UK in October 2019 and has been introduced by the government to combat missing trader fraud.
The new taxation charge will mean that VAT cash will no longer flow between construction businesses. Come October, for every transaction that is made, the VAT will be registered and stated on the invoice as a reverse charge.
This means that rather than the supplier charging and accounting for the VAT, it will be the customer of the supplies who will hold the VAT and pay this over to HMRC on their return.
The reverse VAT charge will apply to the same range of construction services between VAT registered businesses that are covered by the Construction Industry Scheme and where the customer makes an onward supply of the same construction services.
For example, an office block needs a fit out. The person who owns the building is the end user. They engage with a main contractor for the work. You are the electrical firm who is brought in, by the main contractor, to fit the lighting on the project. Because you are supplying a construction service to the main contractor, who isn’t the end user in this case, the reverse charge will apply, and you will no longer receive VAT on top of the value of your services. Instead, the main contractor will hold the VAT money and pay this to HMRC on their VAT return.
Any VAT-registered contractor that pays another VAT-registered contractor will need to adjust their accounting systems to include a VAT reversal code on all invoices in order to remain compliant.
Small businesses who are reliant on VAT income moving up the supply chain may suffer financially as a result of the reverse charge. Many businesses currently rely on the additional 20% as working capital before paying it over to HMRC on their quarterly VAT return.
It is vital that businesses prepare for potential cashflow issues way in advance of when the reverse charge is introduced.
The reverse charge only applies to supplies of specific construction services to other businesses in the construction sector. A few examples include:
Certain supplies are excluded from the reverse charge, they include:
The construction industry experts at Exchequer Accountancy can help you through these VAT changes to ensure that the day to day running of your business remains the same.
Get in touch today to discuss your construction business and let us make sure you are fully prepared for October’s changes.