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Are you affected by the new VAT reverse domestic charge rules?

By RJP LLP on 17 January 2019

Big changes are afoot concerning the way that VAT is calculated and paid within the construction industry, which come into effect on 1 October 2019. Known as the ‘domestic reverse charge’, it means that affected companies will no longer be paid VAT for related work by their business customers.

This reverse charge will only apply where the recipient of the construction services is not the end user of them. In other words, they are buying in those services for onward sale e.g. a sub-contractor selling to a main contractor who in turn is selling those services to an end user.

The way this will work is that the supplier providing relevant construction services (together with associated building materials) for which VAT would ordinarily be payable at the standard or reduced rate, will no longer have to charge 20% / 5% VAT. Instead, the customer accounts for the output VAT and then claims the same amount back as input tax subject to the normal rules (e.g. partial exemption etc). In other words, the recipient of the construction services charges itself VAT and recovers the amount as input tax subject to any restriction on VAT recovery they may have.

 

What are the VAT charge exceptions?

There are some exclusions to this reverse charge rule such as;

  • Zero rated construction services
  • As mentioned above, relevant construction services provided to the end user of those services e.g. Mr Bloggs down the road having an extension constructed will still have to be charged 20% VAT by his VAT registered builder.
  • Relevant construction services made to connected companies
  • Supplier and recipient are landlord and tenant (or vice versa)

 

What next for VAT regulations?

HMRC have promised to release further information on these changes over the next couple of months including examples of how this will work in practice.

In making this change, the government hopes to reduce the level of missing trader VAT fraud occurring within the construction industry, where unscrupulous persons were charging VAT on construction services to their customer but then absconding with the payment before paying over this VAT to HMRC.

The whole legislation appears quite mind-boggling and we recommend that you seek expert advice from our VAT specialists to understand how you are affected.

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Big changes are afoot concerning the way that VAT is calculated and paid within the construction industry, which come into effect on 1 October 2019. Known as the ‘domestic reverse charge’, it means that affected companies will no longer be paid VAT for related work by their business customers.

This reverse charge will only apply where the recipient of the construction services is not the end user of them. In other words, they are buying in those services for onward sale e.g. a sub-contractor selling to a main contractor who in turn is selling those services to an end user.

The way this will work is that the supplier providing relevant construction services (together with associated building materials) for which VAT would ordinarily be payable at the standard or reduced rate, will no longer have to charge 20% / 5% VAT. Instead, the customer accounts for the output VAT and then claims the same amount back as input tax subject to the normal rules (e.g. partial exemption etc). In other words, the recipient of the construction services charges itself VAT and recovers the amount as input tax subject to any restriction on VAT recovery they may have.

 

What are the VAT charge exceptions?

There are some exclusions to this reverse charge rule such as;

  • Zero rated construction services
  • As mentioned above, relevant construction services provided to the end user of those services e.g. Mr Bloggs down the road having an extension constructed will still have to be charged 20% VAT by his VAT registered builder.
  • Relevant construction services made to connected companies
  • Supplier and recipient are landlord and tenant (or vice versa)

 

What next for VAT regulations?

HMRC have promised to release further information on these changes over the next couple of months including examples of how this will work in practice.

In making this change, the government hopes to reduce the level of missing trader VAT fraud occurring within the construction industry, where unscrupulous persons were charging VAT on construction services to their customer but then absconding with the payment before paying over this VAT to HMRC.

The whole legislation appears quite mind-boggling and we recommend that you seek expert advice from our VAT specialists to understand how you are affected.