HMRC has published extended guidance on the new domestic reverse charge for building and construction services, which will be introduced on 1 October 2019.
The new guidance appears to cover much more detail than was included with the draft legislation in December 2018. But this is such a fundamental change to the VAT rules it seems likely there will be transactions where the new rules create disputes.
The domestic reverse charge (DRC) is a major change to the way VAT is collected in the building and construction industry. It requires the customer receiving the service to pay VAT to HMRC instead of paying it to the supplier.
It will only apply to individuals or businesses registered for VAT in the UK supplying specified services reported under the Construction Industry Scheme (CIS). The DRC does not apply if the service is zero-rated or if the customer is not registered for VAT in the UK. It also does not apply to services which are supplied to ‘end users’ or intermediaries connected with end users. More details are in the HMRC guidance.
There have been updates to the previous draft guidance on the following:
- How to check whether the customer is VAT registered or CIS registered
- How and when it is necessary to check that a customer is an end user or an intermediary
- Changing VAT treatment in the middle of a contract
- Completing VAT returns
- Contracts spanning 1 October: the guidance outlines transitional rules for payments due on any supplies entered into accounting systems before 1 October 2019, but paid on or after 1 October 2019.
- Where large contractors hold many contracts with a single subcontractor: if the DRC applies to more than 5% of those contracts (by volume or value) the HMRC guidance says the DRC may be applied to all the contracts.
HMRC has advised businesses will need to prepare for the change by:
- checking whether the DRC affects either sales, purchases or both
- informing regular clients or suppliers
- ensuring accounting systems and software are updated to deal with the DRC
- considering whether the DRC will have an adverse impact on cash flow as the (legitimate) opportunity to use the amount of VAT paid, between the time it is received from the customer and the time it has to be paid over to HMRC, will no longer exist.