Get Ready for Construction Reverse Charge
Although there is a still a great deal of uncertainty surrounding how new VAT rules affecting building contractors will work from 01 October 2019, there are things you and your clients can usefully do now to get ready for the change.
Despite the law now having been passed via a new statutory instrument, details of precisely how the new reverse charge will work have still not been finalised.
We all know that VAT is self-assessed tax so surely it is reasonable to expect decent advance notice of any new VAT rules so we can all get our clients organised. However, yet again, HMRC are seriously late in providing final guidance on new rules leaving us all with no choice but to take action at the 11th hour. Fortunately there are things that can be done now as outlined below.
In the nutshell the new reverse charge is intended to work as a fraud prevention measure. It will do so by moving the obligation to pay VAT due to HMRC on some B2B supplies of building work away from the supplier and on to the customers. If the customer can fully reclaim VAT then the new self-imposed VAT charge will wash through in the same way as any other VAT charge under current accounting rules. VAT will continue to be chargeable by the contactor on all supplies made to the end user, being all B2C supplies plus some made on a B2B basis. The reverse charge will apply through the B2B supply chain where Construction Industry Scheme (CIS) reporting is required up to the point where the customer receiving the supply has to be treated as the end user. It seems that HMRC think this should all be an incredibly easy shift for everyone to implement and so far appear deaf to questions and concerns being raised by trade and professional bodies.
Even though, under the new rules, contractors may often not be charging VAT on their invoices, there will still be a lot of work for them to do. For many the new rules will mean the contractor needs to operate two different accounting systems; one where invoices are issued with VAT charged to the end user and the other where the customer is liable for the VAT under the reverse charge. So a key new task for the contractors will be to establish whether, in respect of the work in question, the customer is an end user.
In some situations a customer might be acting as the contractor so that the reverse charge applies and in others the same customer might be the end user so that VAT needs to be charged. This leaves the supplying contractor obliged to confirm end-user status on a job by job basis. One big unresolved question is what happens if there is a mistake resting on this end user status question. Whose problem is it? Who would be penalised for getting it wrong? In order to not be charged VAT, what if a customer purposely doesn't say they are an end user? Who is then to blame? Conversely what happens if someone forgets to say they are end user for that particular supply? Who will be held to blame for that? These are all questions that HMRC have yet to address.
Even where the reverse charge applies to a particular project the supplying contractors will still have to split the work done into the 3 VAT rates and inform the customer of the VAT they need to bring to account but without issuing an invoice. This will entail some kind of new system or methodology outside anything that currently exists. Perhaps everyone will have to invent their own Excel spreadsheet and notification templates but doesn't that strike you as odd given the current march towards digitalisation?
Another potential issue arises from customers processing reverse charge purchase invoices. Every organisation will post VAT-free purchases so absence of VAT on an invoice will not be a sufficient flag to trigger the reverse charge entry. HMRC do not appear to have focused on how they will police the accuracy of customer accounting. So the contactor issues a reverse charge document and the customer fails to notice that it is not just a VAT free invoice and as a result fails to make the reverse charge entries. If the customer cannot fully reclaim VAT it seems inevitable that penalty risks will arise from this situation so that affected customers need to work out their own self protective measures.
HMRC have encountered a lot of resistance to the new reverse charge including, it seems, from employment bodies. So much so it now seems likely that labour only supplies may fall outside the new provisions. This remains unconfirmed but if it comes to pass surely this negates the whole point of the reverse charge?
It is vital that any businesses affected by the new reverse charge currently using the Flat Rate Scheme (FRS) leave the scheme before the new rules come into effect. The FRS would leave the same percentage of income due as VAT payable to HMRC even if the VAT element is being handled by the customer under the reverse charge so lack of attention here could prove to be very costly.
Despite all of the uncertainty surrounding the new reverse charge there are still things we can do now to get ready for October -
- Flat Rate users need to leave the scheme before October 2019Key for contractors will be to decide how to charge VAT only to end users.
- End users on the receiving end of construction work need to confirm their status to the contractor.
- Contractors need to devise a method by which end user status is confirmed.
- Any contracts should provide for the customer paying any penalties that arise from them providing incorrect end user information.
- Contractors need to decide how they will notify the value of work done at different VAT rates falling under the reverse charge without issuing an invoice.
- Any construction customers need to isolate incoming reverse charge invoices and bring VAT to account via box one and box 4 (subject to non-business and partial exemption restrictions) on the VAT returns.
- Prepare a funding plan for potentially delayed VAT refunds – current net VAT payers are likely to be making refund claims which HMRC are likely to query.
- Devise an action plan to protect against customer delays while they adjust to the new process.
Given the significant gaps in information currently being provided by HMRC it is impossible for affected businesses to conclude on how they will deal with the new rules. All anyone can do for now is plan for the elements that seem certain and revisit the arrangements once we know more.
By Melanie Lord – Director of AVS VAT. Email firstname.lastname@example.org or call 01438 716176
Helping you and your clients avoid VAT problems