Changes to VAT for the Construction Industry from October 2019 - are you ready?

From 1st October 2019, the Domestic Reverse Charge for VAT for the Construction Industry will come into force, and our research with our client base suggests many people aren't aware of the coming changes, or don't understand the impact it will have on their business. Here's our brief guide to what it is, who needs to apply it, and how it will work in practice. We will also be running a drop in clinic at the Panthera offices on Monday 9th September from 3-5pm where we will be free to help answer questions from any CIS registered businesses who will be affected.

What is the Domestic Reverse Charge for VAT (DRC)?

From 1st October 2019, VAT registered businesses in the Construction Industry will apply the domestic reverse charge to their invoices for standard or reduced rate supplies that also fall under CIS.  These will be called specified supplies. In practice this means that the customer who receives the services pays the VAT over to HMRC, not the supplier. The supplier no longer charges VAT on their invoices of specified supplies, but marks them as being subject to the DRC. As with CIS, if your customer is the end user (for example if you're building an extension for Mr & Mrs Smith, and billing them directly for the work) then you continue to apply VAT rules in the usual way.

Why the change?

The thinking is that this will help to combat "missing trader" fraud, where construction businesses "disappear", owing HMRC large amounts of VAT that they have collected from their customers, but not paid over to the state. Since DRC means that the supplier never collects the VAT, this should eliminate the issue. 

What do I need to do?

If you're a subcontractor under CIS, you'll need to switch the way you bill from 1st October. 

You will need to check if the customer that you supply is an end user or an intermediary. You can do this by asking them, and keeping a record of their answer. It is the customer's duty to ensure that the correct VAT treatment is being used. There is more information about this on the HMRC website here : https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#ask-customer

If the customer is an end user, you apply the usual VAT rules as you would now, and charge VAT at the appropriate rate.

If they are an intermediary, you won't add VAT onto your materials and labour anymore, instead you will provide your contractor with an invoice that states that the supply is subject to DRC. Your customer will then apply the VAT reverse charge to your invoice, which means that they pay over the VAT that you would have charged them, directly to HMRC, but are also allowed to reclaim it as usual.

What does it mean for my business?

If you are a supplier of services as a subcontractor under CIS, it will have an impact on your cashflow. Let's take an example:

You bill ABC Builders Ltd for your work for the month at £5000 for labour and £1000 for materials. Currently that bill would be for £6000 plus VAT = £7,200. You would receive £