You may recall plans for the VAT reverse charge being postponed from October 2019 to October 2020. The now majority Conservative government is still keen to press ahead with these plans, so now in the run up to the end of the current tax year it is as good time as any to start planning for how this may affect you.
New rules come into force in October 2020 for VAT-registered firms reporting under the Construction Industry Scheme (CIS) as part of HMRC’s attempt to tackle fraud in the industry.
What is the Domestic Reverse Charge?
The domestic reverse charge (meaning UK-only) will be introduced from 1 October and means that businesses receiving certain services will have to pay VAT directly to HMRC instead of the supplier of those services. This removes the flow of money from VAT between businesses, with the onus on the recipient of services to account for the VAT.
Who is affected?
Those affected include sole traders and individuals working as contractors, or sub-contractors to larger contractors, or through agencies. CIS registered companies and companies invoicing non-CIS registered clients will continue to charge VAT as usual.
The charge applies only to supplies subject to standard or reduced rate VAT, not to zero-rated supplies or suppliers below the VAT threshold. VAT accounted for under the charge will not count towards the VAT registration limit for the recipient.
The specific services targeted include:
- installations of systems such as heating, air-conditioning, power, drainage, sanitation etc.
- internal or external painting and decorating
- construction, demolition, repair or alteration of any structures.
Excluded from the reverse charge are professional work from surveyors and architects, machinery delivery or installation of security systems.
Any contracts that are only partially completed by the October start date will have to be reviewed to assess whether the new charge needs to be applied to unfinished elements of a project.
Subcontractors will need to plan for cashflow implications as previous, perfectly legitimate, uses of VAT around cashflow will disappear.
Penalties for non-compliance
HMRC has said that it will apply a ‘light touch’ on any penalties for the first six months to allow firms to transition to the new regulations. If businesses are seen to be trying to comply with the new rules, and correct any errors as soon as possible, they should avoid being penalised.
A VAT registered subcontractor, under the current rules, raises an invoice of £1,000 + VAT = £1,200 gross to a main contractor.
Under the rules from 1 October 2020:
- The subcontractor will send an invoice for £1,000 to the main contractor The invoice still needs to show the VAT that should be paid to HMRC even though the subcontractor will not put on their own VAT return or pay it over to HMRC
- The main contractor will pay the subcontractor £1,000 (rather than the £1,200 under the current rules)
- The main contractor will add £200 VAT on the subcontractor’s sale onto their own VAT return as sales VAT.
- The main contractor can then reclaim £200 of VAT on their VAT return as normal
The rules only apply to services that would normally be charged VAT.
What do you need to do?
- Review supplies made to and received from other VAT registered contractors to check if these will be subject to a reverse charge from October 2020
- Ensure that your customers are an end user and obtain confirmation of their VAT registration and CIS status
- Ensure your accounting systems are up to date a ready to deal with this change
- Consider the impact on your cash flow from October 2020 and explore ways to mitigate this
Plan ahead – don’t leave it too late!
There are several areas still to be clarified, but if you or your business may be affected from October then as ever it is always important to plan ahead and take action now.
If you need any assistance with the transition please contact Jonathon Dickens, Partner at SMH Chartered Accountants on 0114 266 4432 or [email protected].