There are major changes coming to the method of accounting for VAT which could result in significant changes to invoicing arrangements and increase cashflow pressures for contractors and construction companies.
Who will it affect?
Contractors engaged in building or construction services who trade with other VAT registered contractors. If you supply or receive services under the construction industry scheme that are currently subject to VAT then it will affect those services, but for VAT it will also include charges for materials. If you are unsure of whether the services you supply or are supplied to you will fall within these regulations please let us know.
What is the change?
Currently VAT is charged by the supplier of the construction services and materials. They issue a sales invoice for the value of their materials and services and add VAT where applicable, and receive a gross payment from the recipient of the services. The contractor then makes regular VAT returns to pay the VAT element collected at source to HM Revenue & Customs. The recipient of the services will record the purchase invoice in their records and claim the input VAT where applicable.
However, from 1 October 2020 it will be the recipient of the services who will be responsible for the reporting of VAT. Where appropriate the contractor issuing the sales invoice will no longer account for VAT on their sales invoice for the supply of the services and materials. Instead the recipient of the materials and services will account for the output VAT and input VAT (if recoverable) calculated on the net value of the purchase invoice received, under the new reverse charge method on their own VAT return.
Details of the changes can be found on this link to HMRC website: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
When is the change?
The changes come into effect from 1 October 2020 and supplies of services and materials after that date. Special rules will apply for contracts for services which span 1 October 2020.
The effect
This is not changing the VAT treatment of the supplies, but instead only the method of collection of VAT. If services were standard rated or reduced rated before 1 October 2020 they will continue to be.
Aside from the administration change that is required for both the contractors and the construction company this will detrimentally impact upon the cash flow of the contractor, but improve the cashflow of the larger construction companies. The contractors currently can benefit from holding the VAT paid by the recipient until the payment of VAT is required by their next quarters VAT return which can be up to 4 months after the payment has been received. Contractors should prepare for increased pressures on their cashflow and may need to consider methods to ease these pressures.
Exceptions
If the contractor and the construction business they supply to are connected then there is no requirement for the reverse charge to apply. This exemption also applies for supplies between landlords and tenants.
What contractors need to do
If you’re a contractor you’ll also need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts. You’ll need to notify your suppliers if it will.
What sub-contractors need to do
If you’re a sub-contractor you’ll also need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end user or intermediary supplier.
If you would like to know more about if or how these changes will affect your business please contact us.