VAT change coming for construction industry

In just under a year’s time, HMRC will change the way it collects VAT from construction organisations. The new VAT reverse charge will apply to construction or building related services from October 2019.

The government estimates that between 100,000 and 150,000 companies will be affected and could push small and medium-sized enterprises (SMEs) into a possible cashflow problems. So if this is going to affect you, make sure you start planning early!

What is the reverse charge?

Under the new rules, a VAT-registered company purchasing certain construction services will be responsible for accounting the VAT to HMRC, rather than the supplier. The reverse charge includes goods, where those goods accompany the specified services.

Why has this change come about?

The new measures are being introduced to reduce VAT fraud and evasion by placing the responsibility for VAT on the customer. HMRC believe that some small VAT-registered suppliers are charging VAT to their customers, but not then paying the VAT on to HMRC.

In some circumstances, the reverse charge mechanism won't apply, so the normal VAT rules will instead:

• If the supplies are zero-rated, including the construction of housing.
• The customer is an 'end user', for instance the property owner or the main contractor who sells a new build to a customer.
• Where businesses that supply certain services to connected parties within a corporate group structure, or with a common interest in land.
• The supplier and recipient are landlord and tenant, or vice versa.

If you are concerned that the new reverse charge mechanism will make your VAT administration more complicated, we can advise you on how best to handle it.

We also have more general tips on VAT for Business, which can be found here.