HMRC is concerned about the current levels of “missing trader fraud” where a supplier is issuing a VAT invoice and collecting VAT from their customer before going “missing” – without declaring the VAT.
To combat this VAT fraud, HMRC are due to introduce a new “reverse charge” system from October 2019 for dealing with VAT on building and construction work.
What is it?
The “reverse charge” means that some suppliers and sub-contractors will not be paid VAT and the VAT will instead be paid directly to HMRC.
Who will it affect?
The change will affect suppliers and contractors of building and construction services who are engaged by another business that is making an “onward supply of services” within the supply chain (e.g. a main contractor). It will not apply where the person engaging the supplier or contractor is the end user. It therefore does not apply to consumers or businesses who are not involved in the construction industry. It is currently unclear as to whether it will apply to developers – guidance on this point has been sought from HMRC so watch this space!
When will it be introduced?
The VAT reverse charge for building and construction services will come into effect from 1 October 2019.
What do Contractors and suppliers need to do?
Anyone involved in the construction industry will need to consider whether the reverse charge will apply to the services they supply or procure. If it will apply, then they may need to amend their standard contracts or terms of engagement to address the issue of reverse charging. HMRC has confirmed that they will apply a ‘light touch’ in dealing with errors that arise in the six month period following the introduction of the reverse charge but after that any errors could lead to fines and claims to reimburse HMRC if suppliers have defaulted in paying VAT.
Contractors should also ensure that their accounting systems are updated in good time and that their staff receive adequate training in order to deal with the changes. Sub-contractors will also need to consider the potential impact that the reverse charge may have on their cash-flow.