The VAT Reverse Charge - what is it and when is it coming into force?

Several industry groups have reported that companies are unprepared for the new change to VAT rules that were due to come into effect on 1 October 2019. A recent survey by the Federation of Master Builders (FMB) found that 69% of their members were not aware of the changes at all and, of those who were aware, only a third had the necessary measures in place to ensure their business was ready.

Last week, on 6 September 2019, HM Revenue and Customs published a policy paper explaining that the introduction of the domestic reverse charge for construction services will be delayed by 12 months. This delay now offers a major opportunity to ensure businesses are compliant by the new start date of 1 October 2020.

It's easy for businesses to become focussed on the current political climate and with the welcome delay of the reverse charge the CIOB are encouraging construction firms to become more familiar with the change to VAT rules. To help prepare for the change, we have produced this short guide to the VAT domestic reverse charge for building and construction services. 

What is it?

The VAT domestic reverse charge for building and construction services, widely referred to as the reverse charge, will come into effect from 1 October 2020. 

The reverse charge is a change in how VAT is handled for certain supplies of construction services and is intended to remove the opportunity for missing trader fraud in the construction sector. The scheme means that sub-contractors will require the contractor employing them to pay the VAT directly to HMRC. The introduction follows the success of similar reverse charge schemes for the likes of computer chip and mobile phone retailers (introduced in 2007), wholesale energy suppliers (introduced in 2014) and electronic communications (introduced in 2016). 

The reverse charge only applies to VAT-registered businesses who supply or receive specified services that are reported under the Construction Industry Scheme (CIS).  

What you need to do 

You need to prepare for the 1 October 2020 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 cashflow
• Making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

How should building contractors prepare for this change?

Businesses should attempt to become familiar with what is and isn’t included under the reverse charge and communicate with any contractors they regularly use to ensure they also understand the new scheme. 

It’s possible that the reverse charge may affect projects that are underway - if they end after the 1 October 2020 then it's likely that reverse charge invoicing will apply. 

HMRC have released guidance on the reverse charge which details what services will be affected, how the reverse charge works, and other technical details businesses will need to understand.

Construction Manager has previously heard from Alison Birch, VAT partner at Mitchell Charlesworth, discussing what the scheme means for businesses in the construction industry.

Sage have also produced a comprehensive FAQ for the new VAT rule.