The way VAT is collected is changing from the 1st October 2019. But there is still some uncertainty as to what the changes entail. Those in the Construction Industry are concerned that this could impact cashflow, which naturally, could mean changes to payment terms and stress on back office staff.
Which construction services will be impacted by the VAT reverse charge?
HMRC has identified which elements of construction services will be impacted by the VAT reverse charge. These include alteration, repair, extension, demolition or dismantling of buildings, or structures (whether permanent or not), including offshore installations.
Businesses that only undertake work for consumers, construction companies that will not onward supply your services, supplies between landlords and tenants or connected parties will not be affected by the VAT reverse charge. However, if a contractor is doing work for larger construction firm, the reverse charge may apply, depending on where they are in the chain.
Once the changes come into force VAT cash won’t be exchanged within the supply chain in the way that it is currently. VAT registered businesses in the construction sector will issue a VAT invoice for their services which states that their service is subject to the VAT reverse charge. Essentially the VAT will be calculated as a paper exercise and will only be charged by the business at the top of the supply chain.
HMRC estimates that between 100,000 and 150,000 companies will be affected and will most likely incur extra costs in the following areas:
- Costs for familiarisation with the new rules
- Adapting VAT accounting systems and processes to enable reverse charge supplies to be calculated and reported
- Keeping records of all reverse charge supplies
- Checking purchases are correctly treated
- Additional time spent on VAT returns.
What action should businesses take?
- Review supplies made to and received from other VAT registered contractors to establish whether these will be subject to a reverse charge from October 2019
- Consider the adaptation that will need to be made to their accounting systems to deal with this change
- Consider the impact on their cash flow from October 2019 of not receiving the VAT from their customers and if there are any other ways to mitigate this impact.
The concern at the moment is that the changes haven’t necessarily been widely publicised and many firms haven’t started to prepare. Contractors, small and medium construction businesses and recruitment agencies operating in the construction sector will all need to consider if the change will have an impact on them and will need to look at their accounting systems to ensure they are ready for October.
For further information please contact us on 01923 277900. Alternatively, if you are hire contractors and would like to see our payment solutions which we offer for Construction workers please visit our CIS (Construction Industry Scheme) page.