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Important new VAT rules for Construction Services from 2019


Melanie Lord AVS Vat Strategic Support

HMRC have announced the introduction of a new reverse charge that will apply to all construction services from 1 October 2019.  The new rules do not have an entry threshold and will have a significant impact on the administrative burdens of an estimated 300,000 affected businesses.

There is a consultation document and draft legislation available on HMRC’s website with the consultation period closing on 20 July 2018. HMRC expect this to be of most interest to sub-contractors and contractors carrying out supplies reported through the Construction Industry Scheme.

The new reverse charge will mean that –

  1. Each business customer in any supply, or chain of supplies, of construction services will have to charge itself VAT on the cost of bought-in qualifying services and reclaim the same amount as input VAT (subject to normal rules and restrictions).
  2. The supplier will only invoice and be paid the net value of the supply.
  3. The business customer will pay the net value to the supplier and pay the VAT element direct to HMRC via box 1 of its VAT return.
  4. The final customer (either non-business or a private individual) will be charged VAT by the supplier in the normal way.

The new rules will apply to a very wide definition of ‘construction services’ including alteration, repair, extension, demolition or dismantling of buildings or structures and infrastructure such as roads, railways and waterways. The reverse charge will also apply to painting and decorating but not to professional services such as architects, surveyors and building, engineering, decoration or landscaping consultants.

The driving force behind the new rules is fraud prevention.  By the customer accounting for VAT on the supply, fraudsters cannot charge, collect and retain amounts of VAT that they should pay over to HMRC.  The regime should remove the tax losses being suffered on construction services via missing trader or Phoenix frauds which the Government estimates will save an average of £100m a year.  Other successful reverse charge provisions already apply to mobile telephones, computer chips and emissions allowances countering frauds across the EU thought to have cost governments £billions.

While everyone has to pay their taxes and fraud should not be tolerated, this new reverse charge will create a significant new accounting burden for affected businesses.  HMRC are accepting this could be a problem for many businesses which is why they have announced a long lead time.

The final version of the legislation will be published in October 2018 and in the meantime advice must be to start making preparations early, not least as we also have to survive Brexit and Making Tax Digital.