VAT - Domestic Reverse Charge In The Construction Industry From 1 October 2019

VAT - Domestic Reverse Charge In The Construction Industry From 1 October 2019

The introduction of the Construction Services Domestic Reverse Charge (CSDRC) from 1 October 2019 was announced in the Autumn Budget of 2017 in response to an increasing incidence of ‘missing trader’ fraud committed by subcontractors that provide labour for the construction industry.

Despite its name, the CSDRC is nothing to do with private households. It is domestic only in the sense that it applies to transactions wholly within the UK.

It will affect sub-contractors making standard rated or reduced rated supplies to contractors reportable under the Construction Industry Scheme (CIS), unless the contractor is a self-certified ‘end user’.

The CSDRC applies to “construction operations” that are subject to the Construction Industry Scheme (CIS). These include:

  • Groundworks/other preparatory works
  • Construction alterations and repair of buildings
  • Installing heat, light or power systems
  • Internal and external painting and decorating. 

It does not apply to professional services such as architecture or surveying; extraction of minerals and drilling for oil or gas; or repair of building components such as boilers.

With effect from 1st October 2019 the onus to report the VAT will rest with the contractors that receive services rather than with the sub-contractors who supply them. Currently a simple supply chain might be as follows:

 

From 1 October this would change to:


Applying the reverse charge is a two-stage process for the main contractor:

  • It treats the supply from the subcontractor as if it was supplied by itself and charges itself VAT (at the appropriate rate – 5% or 20%). This has to be paid to HMRC in the VAT return
  • As VAT is charged on to the end user, this CSDRC VAT is treated as expenditure and recoverable in the normal way (on the same VAT return). 

The CSDRC prevents the subcontractor from charging VAT and not paying it to HMRC, but should not create a VAT cost to the main contractor; it should be tax neutral.

The change does not take effect until 1 October and so, particularly in light of the Making Tax Digital for VAT requirements, there is time to ensure that your systems are set up to report it and recognise when it is applicable (or not). Sub-contractors may also need to consider the impact on cash flow. The opportunity to use VAT to fund cash flow between the time it is received from the customer and the time it has to be paid over to HMRC will no longer exist. However, contractors will no longer suffer a delay between paying out VAT and recovering it, as both will now be dealt with on the same VAT return. Ongoing checks should also be carried out to ensure that supplies and purchases are correctly treated.

We have put together a decision tree to determine whether to apply normal VAT rules or the Domestic Reverse Charge. Please click here to view the document.

HMRC will publish detailed guidance on the changes in due course and we will be in touch again with more information as and when it becomes available.

If you require any advice in preparation for the changes or assistance in adapting your accounting systems please don’t hesitate to get in touch with our Tax Partner, Steve Crompton, or our Cloud Accounting and Business Outsourcing Manager, Sarah Smith, on the details below. We can work with you to determine how the CSDRC may apply to your business and, where applicable, determine which changes may be required to your systems to comply with the new rules.

Steve Crompton
Partner – Head of Tax
direct dial: 01942 292541
mobile: 07790 840394
email: steve.crompton@jsllp.co.uk

Sarah Smith
Cloud Accounting & Business Outsourcing Manager
direct dial: 01942 292527
email: sarah.smith@jsllp.co.uk


 

 

 

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