VAT and the Autumn Budget
The recent budget seemed very quiet on the VAT front – and if you thought that, you would be half right.
There were no major controversial changes, but within the detail there were a few announcements that will either affect certain businesses quite significantly, or are signals about future potential changes. Changes in the construction industry have, in our view, flown under the radar a little and so we thought it would be useful to highlight these changes.
Reverse charge for supplies in the construction industry
The reverse charge is by no means a new concept in the world of VAT. One of the first examples in my memory was this being applied where services were purchased from outside the UK. This has since been expanded to much of the cross-border trade in the EU. It is also being used as a powerful tool to counter areas HMRC deem to be abused by fraudsters.
The legislation for this reverse charge, labelled ‘Domestic Reverse Charge’ or DRC, is contained within s.55A VATA 1994, and this legislation also applies to mobile phones, telecommunication services and emission allowances to name a few. Supplies in the construction industry is just the latest item to be added. It is set to become law on 1st October 2019.
This measure will include goods supplied with those construction services and is likely to affect the majority of supplies in the construction industry. The difficulty will be to capture the correct information to ensure the rules are applied correctly, and to take note of the few exceptions to the normal rules.
Another difficulty is that whilst the reverse charge generally ‘fixes’ the problem it addresses, the fraudsters will simply move to a new market, potentially replicating the current problems and solutions.
Where a supply is caught by the DRC the supplier does not charge VAT, but instead the customer declares and recovers VAT on behalf of that supplier. The supplier should notify their customer that the reverse charge applies on their invoice.
Supplies caught by the Construction Industry Scheme (CIS) are also caught by DRC which uses the same terms and definitions used by CIS. DRC applies when;
- The supply is caught by the definition for CIS;
- The supply is at a positive rate of VAT;
- The customer is VAT registered;
- The customer is registered for CIS and
- The customer is not an ‘end user’.
The default rule is for the DRC to apply; this is very different from normal VAT treatment where the onus is on the supplier to tell the customer that the reverse charge applies. The ‘end user’ should let the contractor know that they are an end user and the contractor then charges them the rate of VAT applicable.
Where there is a mixed supply, VAT needs to be accounted for as though the entire supply is standard rated.
HMRC will be issuing detailed guidelines imminently however, there are some concerns, namely:
- What happens if an end user does not certify that they are the end user?
- If there are mixed supplies, but these have been treated as standard rated all through the supply chain, how accurate will the final supply be? If the end user is unable to recover all of their input tax, any apportionment may well be challenged.
- How are white goods identified?
- Will unregistered businesses realise that this reverse charge does not count towards taxable turnover? All other reverse charge transactions do.
On a positive note HMRC have confirmed that for the first six months they will apply a light touch in respect of penalties, to allow businesses to adjust accordingly.
If you are a property developer, a landlord receiving building supplies, or are involved in construction services, and in particular CIS, then it is recommended that advice is taken to ensure you are ready for the legislative change in October 2019.