Construction sector urged to prepare for new VAT accounting rules

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Builders, contractors and other trades involved in the construction industry have been urged to get to grips with a new way of accounting for VAT.

The reverse charge for construction services is being introduced by HM Revenue & Customs (HMRC) to combat so-called missing trader VAT fraud.

This happens when a supplier charges VAT, is paid and then “goes missing” before declaring it to HMRC. Under the reverse charge, the customer self-accounts for the VAT, so there is no opportunity for the supplier to disappear.

The new reverse charge comes into force next October.

The new reverse charge rules will apply not just to building and services and will include other related services, such as alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating.

Some works will not be covered and invoicing for these will not change – for example professional services supplied by architects, surveyors and consultants; the drilling for – or extraction of – oil, natural gas or minerals; and the manufacture or delivery of building or engineering components, heating, lighting, air-conditioning, ventilation, power and water supply, drainage, sanitation and security systems.

Tony Jackson, VAT director at Smith & Williamson in Birmingham, says the benefit to the Treasury – estimated at around £100m – may be outweighed by the cost of compliance for the many small and medium-sized businesses that will be affected.

“Businesses that supply construction and related services need to understand how they may be affected by this change,” said Jackson.
“They should be identifying where they supply services to other businesses in the construction sector (rather than to a consumer of those services) and if they do operate in this way, they need to determine whether those services are included within the list of specified services that are subject to the reverse charge.”

Jackson says a number of issues have already been raised with HMRC about the new reverse charge rules.

“How does a supplier know whether or not its customer or contractor is onward supplying specified construction services? And where reverse charge construction services are subject to different rates of VAT, who determines the apportionment of services?

“HMRC’s consultation is at an early stage and it is hoped that more detailed guidance will be issued in good time for businesses to ensure that appropriate controls and procedures are put in place before October 2019.”