6 July 2018

Construction businesses beware of a potential new VAT charge

HMRC’s current proposals could pave the way for significant changes regarding accounting for construction projects. Time is running out to have your say.

In an attempt to combat VAT fraud, HMRC is proposing to introduce a reverse charge for supplies between construction businesses from October 2019.  This would result in the customer (rather than the supplier) being responsible for accounting for any VAT due. 

In simple terms, this means that the customer will pay the supplier of construction services, and will also pay any VAT to HMRC. Only businesses operating within a supply chain will be affected – the customer to receive the supply will not be considered a business and should not therefore be affected. This shift of accounting focus appears to bring VAT closer to the principles adopted by the Construction Industry Scheme (CIS).

Businesses which buy goods or services within the construction industry need to be aware of these changes and the impact this could have on them – particularly the cost of increased administration and the threat of penalties for errors.  HMRC has stated that the administrative change will be ‘significant’ for businesses affected by the change, and accounting systems may need to be designed and adapted to calculate the reverse charge.  They will also need to be compliant under the new ‘making tax digital’ requirements. 

A technical consultation on the draft legislation is currently open for comments until 20 July 2018.

The draft rules state that ‘construction services’ covers a wide range of services including construction, alteration, repair, extension, demolition and applies to works on buildings or the installation of heating, lighting, air-conditioning, power and drainage systems. It also covers internal cleaning when carried out in the course of other construction works, painting or decorating and other associated services.  These definitions appear to be based on the term ‘construction operations’ when it is used in the CIS.

Please contact us if you want more information on how this could affect you or want to know how to contribute to the consultation exercise. If you want to know more about these changes or have any questions on how this will affect your business, please contact our specialist VAT team.

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