How changes to the “domestic reverse charge” this October could affect you

In this month's Horsham Accountancy Blog, we focus on one of the key issues facing the construction industry, with VAT changes coming into force from October, which experts predict could cause a cash flow crisis.

It is estimated that more than 150,000 construction companies are facing a 20 per cent drop in cash flow when “domestic reverse charge” changes come into effect – meaning companies will no longer receive their VAT payment when they submit bills.

The cash will instead be paid directly by the customer to HMRC, placing increased pressure on the industry, which has faced vastly increased material costs in recent years.

There seems to be a worrying combination of both lack of awareness and preparedness at a time when many construction companies are already feeling huge financial strain. The timing also coincides with the introduction of Making Tax Digital, in addition to any changes arising from Brexit.

The switch will have a significant impact on cash flow, leading to increased financial difficulty and I would urge companies to prepare now, if they haven't already, for next month's change. Get in touch with me today to discuss your needs on 01403 337490.

HMRC has prepared some useful guidance on the changes, which we've outlined below:

Who will the change effect?

It will apply to individuals or businesses registered for VAT in the UK, but not consumers.

In a nutshell, it will affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS).

How to get ready

You need to prepare for the 1 October 2019 introduction date by:

• checking whether the reverse charge affects either your sales, purchases or both
• making sure your accounting systems and software are updated to deal with the reverse charge
• considering whether the change will have an impact on your cash flow
• making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate.

What steps contractors need to take

If you're a contractor you'll also need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts. You'll need to notify your suppliers if it will.

What sub-contractors need to do

If you're a sub-contractor you'll also need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end user or intermediary supplier.

You can find out more here about end users and intermediary supplier businesses.

Services affected by the domestic reverse charge

The reverse charge will affect supplies of building and construction services supplied at the standard or reduced rates that also need to be reported under CIS. These are called specified supplies.

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.

The reverse charge does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK.

It also does not apply to some services. Find out more found in the End users and intermediary supplier businesses section.

Employment businesses who supply staff and who are responsible for paying the temporary workers they supply, are not subject to the reverse charge. Read the Applying the domestic reverse charge for construction services to certain sectors or types of transactions section for more information.

You will have to apply the reverse charge if you supply any of these services:

• constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
• constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours
• pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
• installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
• internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
• painting or decorating the inside or the external surfaces of any building or structure
• services which form an integral part of, or are part of the preparation or completion of the services described above - including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works

Services excluded from the domestic reverse charge

The following services are not subject to the reverse charge:

• drilling for, or extracting, oil or natural gas
• extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
• manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
• manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
• the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
• making, installing and repairing art works such as sculptures, murals and other items that are purely artistic
• signwriting and erecting, installing and repairing signboards and advertisements
• installing seating, blinds and shutters
• installing security systems, including burglar alarms, closed circuit television and public address systems.

About us

For nearly 10 years, we have been working alongside businesses, offering professional, proactive advice and guidance on key issues, such as planning for major VAT changes. Drop us a message to discuss your VAT and tax queries.

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