Changes in the ways VAT is accounted for in the supply chain for construction services

Tuesday 15 January 2019

Following a consultation in 2017 by HMRC into VAT fraud on the provision of labour in the construction sector (estimated to cost the exchequer around £100 million a year) we now face a change to the way VAT is accounted for in the supply chain for construction services. This change is due to be implemented in October 2019, giving businesses plenty of time to educate themselves and amend their processes to comply.

The main changes are summarised below:

  • The customer (i.e. the end user of the supply) becomes responsible for collecting the VAT and paying it over to HMRC.
  • All suppliers in the supply chain (except the one supplying the customer) will no longer be required to collect/pay any VAT – therefore never obtaining any VAT monies and therefore will no longer have the opportunity to keep it (or as HMRC put it, steal it).
  • Suppliers (except the one supplying the customer) will operate the “reverse charge” arrangement – this means that whilst no VAT is collected/paid by the supply chain it does need to annotate the invoices to reference the VAT which should be charged to the end customer and is still required to report those supplies on its VAT returns.
  • This change impacts all businesses supplying construction services (defined as those caught by the Construction Industry Scheme). This definition includes agencies who make relevant supplies.
  • The rate of VAT paid by the customer is not changing – this is just an administration change.

This change in legislation will impact the entire supply chain for the provision of labour services related to activities within the CIS scheme. This includes personal services companies, umbrella companies, self-employment providers and recruiters. This change should also result in a review of the scope of the services your business is providing. If you are involved in the supply chain for supplies caught by the CIS scheme, from October 2019 there will be two pieces of legislation to comply with – the CIS rules for income tax and the reverse charge rules for VAT. Misclassifying the supply as outside the scope of the CIS scheme could prove to be costly.

What can businesses do to prepare?

  • Review the services you provide to your clients and consider whether they are within the scope of the CIS scheme – HMRC has produced guidance to help businesses to decide –
  • If they are, ensure you understand the new VAT rules and take steps to be ready for the October 2019 changes. This is likely to be amendments to your invoicing process, changes to the information you report on your VAT return and education of staff and your supply chain.
  • Don’t forget that any supplies impacted by these changes will also be within the scope of the CIS scheme for income tax purposes and consider your obligations under this scheme. For example, are you registered, are you submitting the required HMRC returns regularly and on time, are your suppliers registered, do they hold a gross payment status, do they operate the CIS scheme on the payments they make to their suppliers?
  • Consider the cash flow implications on your business – from October 2019 the amount of VAT you hold for a period of time before payment to HMRC may reduce significantly (some businesses rely on these reserves to prop up their business).

By Victoria McDonnell

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