Construction industry body concerned over reverse charge VAT




Just two months before major changes to VAT invoicing take effect for the construction industry, two thirds of SMEs in the sector know nothing about the new reverse charge regime.




In a complete overhaul of the way VAT is payable on building and construction invoices, the introduction of the domestic reverse charge from 1 October 2019 means that the customer receiving the service will have to pay the VAT owed straight to HMRC instead of paying the supplier if they report under the Construction Industry Scheme (CIS).


The Federation of Master Builders (FMB) is calling for a six-month delay to implementation starting that levels of awareness about the changes to VAT reporting are low and few companies have made preparations for it.


A survey of around 8,000 SME construction firms found that 69% were not aware of reverse charge VAT at all. Of those who were, 67% have not prepared for the changes, and the industry body is warning of potential ‘chaos’ when the new regime begins.


The sector will face major complications over the transition period, when all ongoing contracts will need to be reviewed to assess whether the reverse charge applies mid-way through the project.


The reverse charge will affect individuals, sole traders and VAT registered businesses in the UK if they supply or receive specified supplies or services at standard or reduced VAT rats that are reported under the CIS. There is an important difference between CIS and the reverse charge where materials are included within a service. The reverse charge applies to the whole service whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content. 


However, the reverse charge does not apply if the service is zero rated for VAT or it the customer is not registered for VAT in the UK. It will also not apply to individual consumers or final customers of building and construction services.


There are a number of exemptions to the reverse charge rules, including architects, surveyors, interior and exterior decoration and landscape consultants, and security system installation engineers.


In a letter to the financial secretary to the Treasury, the FMB said HMRC had failed to communicate details of the new scheme clearly enough, or to emphasise how major the changes are.


The industry body warns reverse charge VAT will have a serious impact on cash flow, as well as being a significant administrative burden, fundamentally changing the way construction companies invoice their clients and pay their taxes to HMRC.


It says while larger construction companies will have in-house finance teams to handle implementation, construction SMEs and sole traders, which make up 9% of the one million construction firms operating in the UK, will have to do this whilst also running their business.


The letter stated: ‘We believe HMRC could have done much more to prepare the industry for the changes and the action taken so far has not been enough for an industry as large and complex as construction.


‘For example, the guidance document was only published four months before the changes are due to come in. Furthermore, the guidance has been criticised for being unclear and contradictory in places.’


Monthly returns

As a result of the reverse charge some businesses may find that, because they no longer pay the VAT on some of their sales to HMRC, they become repayment traders. This occurs when their VAT return is a net claim from HMRC instead of a net payment.


Repayment traders can apply to move to monthly returns to speed up payments due from HMRC.


The best time to move to monthly returns will depend on the business and whether they want to have monthly returns from October, or to delay a little to offset some of the VAT they owe to HMRC on periods spanning 1 October.


For example, if a customer submits a quarterly return up to 30 September 2019 and requests a change to monthly returns on 14 November 2019, October will be a monthly return and the return periods from then on will be monthly.


If the request is made in December 2019, October and November would be a 2 month return with monthly returns from then on.