On 1st October 2019, HMRC are introducing a VAT Reverse Charge scheme. Simply put, customers will pay VAT on a service to HMRC instead of to the supplier.
Are you ready for the VAT Reverse Charge? It’s coming to a construction company near you in October 2019.
WHAT IS THE VAT REVERSE CHARGE?
On 1st October 2019, HMRC are introducing a VAT Reverse Charge scheme. Simply put, this means that the customer who receives a service will have to pay the VAT to HMRC instead of to the supplier.
Unlike CIS deductions, this will apply to the whole service including materials. The reverse charge will have an impact on sales, purchases or both – moving the VAT payment up the supply chain.
WHO WILL THE VAT REVERSE CHARGE AFFECT?
The scheme will apply to building and construction companies who operate in the UK and are registered for VAT. Not all services are impacted however, so it’s best to take a look at the full list here.
Recruitment businesses who supply staff (and who are responsible for paying the temporary workers they supply) won’t be affected by the reverse charge. Neither will consumers because the charge only applies to business-to-business transactions.
Services that are exempt from VAT as well as businesses that aren’t registered for VAT in the UK won’t be affected by the reverse charge either.
HOW WILL THE VAT REVERSE CHARGE AFFECT CONTRACTS BEFORE AND AFTER 1ST OCTOBER?
Some contracts will pre-date the reverse charge but the changes will impact the taxation on these contracts after 1st October 2019. In this case, it is the customer’s responsibility to confirm whether or not the services provided are subject to the reverse charge.
HMRC have provided wording which can be sent to, and confirmed by, the customer – allowing a subcontractor/supplier to bill accordingly:
“We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.”
All contracts from 1st October 2019 will need to confirm whether the service is subject to the reverse charge. You can check the VAT status of your customers via the EC Website.
WHAT DO YOU NEED TO DO TO PREPARE FOR THE VAT REVERSE CHARGE?
HMRC is encouraging businesses to prepare for the changes ahead of 1st October. You can find detailed guidance on the government’s website but here’s a quick summary of what you need to do:
- Check if the reverse charge affects either your sales, purchases or both.
- Update your accounting systems and software to deal with the reverse charge.
- Consider whether the change will have an impact on your cash flow.
- Make sure the people in your business responsible for VAT accounting know about the reverse charge and how it works.
Like any significant change to the way you do business, the VAT Reverse Charge may take some getting used to. Fortunately, HMRC has committed to applying a “light touch” when it comes to any errors made during the first 6 months of implementing the charge. This is of course under the assumption that you’ve acted in good faith and are at least trying to comply with the new legislation.
For more information or help with preparing for 1st October, chat to your accountant or read the detailed guidance on the gov.uk website.
Please note: This article contains public sector information licensed under the Open Government Licence v3.0. The content of this article is for information purposes only and should not be relied on as legal or regulatory advice.
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