18 June 2019

VAT – Changes to Construction Services

The VAT treatment of construction services will change on 01 October 2019. Are you affected? Are you ready?

HMRC believes that around £100m of revenue is lost each year as a result of fraud within the construction sector. Some of this is due to suppliers charging VAT and not paying this to HMRC. To combat this HMRC are introducing a domestic VAT reverse charge procedure to the construction sector. This change takes effect from 01 October 2019.

What does this mean in practice?

The change will result in some suppliers of construction services not charging VAT on their sales and their customers having to self-account for VAT on their VAT returns.  Customers that have to self-account for VAT will be allowed to record an equal value as input VAT and can recover this according to normal rules. For businesses that cannot recover all of the VAT they incur, this will result in a VAT cost.  

HMRC guidance states that businesses supplying construction services must not charge VAT to their customers when:

  1. The customer is registered for VAT in the UK; and
  2. The customer uses the services to make onward supplies of construction services

The new scheme will not apply where construction services are supplied to final consumers however the changes to supplies between main contractors and sub-contractors.

The changes apply to “construction services” which include:

  • a) Construction, alteration, repair, extension, demolition or dismantling of buildings
  • b) Installation of systems i.e. heating, lighting, air-conditioning, ventilation, power supply, drainage and water
  • c) Services which form an integral part of or are preparatory to the provision of construction services

What you need to do now?

If you are involved in a supply chain that will be caught by the new rules (either as a sub-contractor or main contractor), you need to confirm the following points:

  • Cash flow: If you are a sub-contractor, from October you won’t charge output VAT on supplies that are caught by the change. From this date you will not receive output tax payments and will not have the short-term cash-flow benefit of this income. You should therefore review the frequency of your VAT returns and confirm how your cash flow position will be affected by the change. 
  • Paperwork: We would suggest that main contractors obtain and retain a declaration from their end users to support the application of VAT on their supplies.  Subcontractors may also want to clarify their position with main contractors to ensure there is no misunderstanding or VAT errors.
  • Accounting treatment & VAT procedures: You will need to change the way that you account for VAT and record  income in your accounts. This needs to be understood and all procedural changes made before 01 October.

We can explain and confirm what this will mean for you.  We have prepared communications that our clients can use to inform sub-contractors and contractors of their position and we are happy to share these with you.  

We will be holding seminars in our offices on the changes in August – if you would like to attend these please let us know.

For more information, please contact either Scott Craig, Alan Glen or Scott Berry.