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Consultation update: Reverse charge VAT scheme for construction industry

By RJP LLP on 12 July, 2018

We wrote an article about a consultation into changing the way that VAT is accounted for in the construction industry earlier this year. The consultation period has now closed and we are awaiting the outcomes. It was undertaken to review the potential to introduce a new ‘domestic reverse VAT charge’ whereby the recipient rather than the supplier would account for VAT due.

Although we don’t yet know the exact nature of the changes, we are going to be monitoring developments closely. Draft legislation will be unveiled in the spring of 2019 and the changes are likely to become effective from October 2019.

What is likely to happen?

It is likely that the policy will operate in exactly the same way as the existing Construction Industry Scheme, whereby a supplier’s direct taxes are paid directly to HMRC by the customer. In this case, what the reverse VAT charge means in practical terms, is that customers would pay the VAT element of their purchases directly to HMRC, rather than it being collected at a later date through the supplier. It will impact all businesses who make purchases within the construction industry, for example, by using or receiving supplies from sub contractors and there will be no minimum size threshold for any transactions.

Who will be affected?

Any business that buys goods and services from the construction industry needs to be aware of the new policy and monitor developments closely. Currently it is unclear exactly how businesses will be affected, they may be residential landlords for example and receiving services from the construction industry for repairs.

There will be no threshold applicable to measure exempt small supplies and no exemption for Flat Rate Scheme users (even though they will effectively have to leave the scheme to be able to recover VAT on the costs). Supplies to an end consumer (either a business or domestic customer) will not be included in the reverse charge scheme.

Overall, this will be a very important change for the construction industry and all businesses using their services to adapt to. It is likely to result in additional requirements for training to account for transactions properly and may also impact cash flow. The reverse charge will also be more complex to implement and track for businesses with multiple VAT rates applicable to their services.

We are monitoring this closely and will be updating in full once the outcomes of the consultation are released. For now, if you are involved with the construction industry and would like specialist support, please contact Anne Eager by emailing partners@rjp.co.uk.

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