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VAT changes to the construction industry

August 23, 2019

HMRC are introducing a new set of VAT rules for the construction industry which will come into effect from the 1st October 2020. The new “reverse charge” will change the person responsible for paying VAT to HMRC between the contractor and sub-contractor.

Changes have been brought in to ensure that VAT fraud is removed from supply chains and will impact up to 150,000 businesses. A wide range of construction businesses who will be affected include builders,joiners, electricians and ground workers.

 

The new system will result in the customer accounting for the sale VAT to HMRC instead of the supplier.

Under the current rules, the sub-contractor (supplier) will send a standard invoice to the main contractor (customer) that states what VAT needs to be paid. The new rules will result in the sub-contractor no longer paying this VAT to HMRC, instead, it will be the main contractor who pays it.Therefore, the main contractor will pay the total amount of money due, less VAT and normal CIS deduction, to the supplier.

 

There are several exemptions to the new legislation including:

·        Only applies to suppliers between VAT registered businesses. Therefore, the VAT treatment to an end user (eg property owner or businesses who plan to sell or rent the property) remains the same.

·        Zero-rated construction of new houses

·        Certain supplies between connected companies and landlords and tenants

 

To ensure you are compliant with the new rules, we suggest that you become familiar with the change in legislation and adapt your accounting systems to enable reverse charge suppliers to be calculated and reported. Any construction businesses effected will also need to keep records of all reverse charge supplies and report them on VAT returns. This reverse charge will impact small and micro businesses as many use the VAT they collect as working capital until they pay it to HMRC.

 

End users also have the responsibility of declaring their position to suppliers to ensure the reverse charge does not apply. This should be done through writing to the supplier.

If you need help to understand the new regulations and get your accounting systems in order, please contact Geoff Campbell on geoffc@dhco.co.uk or 01573 225082. We can set up a consultation to understand your position and provide guidance following this initial meeting.

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