HMRC has been publicising, with varying degrees of success, the launch of a new VAT domestic reverse charge for specific supplies within the construction sector, starting from 1 October 2019; the aim being to reduce the amount of VAT fraud in the construction industry (and in particular CIS traders) by asking customers to self-account for the VAT due on a supply, rather than it being charged by the supplier. Only invoices issued for services supplied to the ‘end user’, i.e. the final consumer of services, are always excluded from the scheme - such services would be subject to normal VAT accounting rules.
HMRC’s latest guidance seeks to clarify the details of the new regime and provides examples of how the reverse charge will work in practice. However, it is important to note that the guidance contains some important changes. These include: a de minimis threshold for supplies made to one customer where the reverse charge only applies to part of the services; the concept of ‘intermediary’ suppliers being deemed to be end users and excluded from the new rules; the inability to use the cash accounting scheme where the reverse charge applies; and, the exclusion of employment businesses supplying construction workers from the new rules.
These wholesale changes to VAT accounting in the construction sector, which also include specific requirements regarding invoicing and the issuance of certificates by end users, come into effect from 1 October 2019. HMRC is promising a light touch on penalties for the first six months following the implementation of the changes, provided HMRC feels that the taxpayer has attempted to follow the new rules. What actions will be considered enough to evidence that an attempt has been made to follow the new rules is not clear.
Our experience suggests that the construction industry is not yet ready for these changes; in particular, for the cash flow issues that will be created by businesses no longer benefitting from temporarily holding on to the VAT charged, in bank accounts for up to three months, prior to submitting a VAT return and making payment to HMRC. In addition, customers may be slower to pay suppliers, compounding the cash flow issues from not holding on to the VAT, as invoices showing VAT charged incorrectly will be rejected by customers until invoices are compliant with the new domestic reverse charge rules.