Your Tax Shop would like to take this opportunity to warn you of the major changes to VAT for the construction industry which HMRC are introducing and will be enforced on 1st October 2019. The Domestic Reverse Charge is an anti-fraud measure to ensure that the customer is liable to account for the VAT with HMRC. This will affect payments customers make to businesses after that date for supplies that meet HMRC’s criteria. It is important that you are aware, understand the changes and plan for them as they may have a negative effect on your cash flow as a business!

So… who will this affect?

The Domestic Reverse Charge will have an impact on the supplies of building and construction services supplied at the standard or reduced rates that also need to be reported under CIS (Construction Industry Scheme). These are otherwise known as specified supplies. This will therefore affect the majority of supplies made by mainly larger contractors dealing with established clients. However, there is an exception – the Reverse Charge does not apply to consumers or final customers of the building or construction service. These customers are referred to as the end consumers and will usually be recipients who use the building or construction service for themselves, rather than sell the service on as part of their business. The legislation will also allow for those connected to end users, including landlords or tenants, to also be treated as end users.

How will the Domestic Reverse Charge affect the way supplies are invoiced?

It seems likely that when working as a subcontractor for mainly larger contractors, the new Reverse Charge rules will apply. This means that after 1st October 2019, when you complete £1,000 of standard rated work:

  • – You will invoice for £1,000 showing your supply as standard rated but NOT include the £200 VAT in the amount payable.
  • – The customer will pay £1,000 (not £1,200 as is currently the case now).
  • – The customers VAT return will show £1,000 plus £200 VAT as both VAT payable and VAT recoverable.  The customer will therefore gain no VAT advantage from the change.
  • – Because you have not been paid £200 VAT by the customer, you will not owe HMRC £200 in VAT.
  • – If you buy substantial materials in subcontracted work, we may also need to consider whether to send in monthly VAT returns in order to recover the VAT you have spent on materials each month, rather than wait for a quarterly repayment.  However, this solely depends on how many of your customers the Reverse Charge will affect.
  • – If you complete work for end consumers, such as domestic customers, or for customers who are not VAT registered or not CIS registered, you will invoice them including VAT as normal.  This will only effect supplies that are of a positive VAT rate e.g. standard rate (20%) or reduced rate (5%). The new rules only affect supplies you make to companies who are not the end user of the building or structure.  Your Tax Shop therefore advise for you to keep a record of your customers’ VAT numbers and ask them whether they include the payments they make to you on a CIS return (i.e. if the work is within CIS and they’re registered under CIS).

How can you ensure you’re prepared?

If the contractors you work for do not pay you the VAT element after 1st October 2019, this may affect your business’ cash flow. Your Tax Shop advises that you MUST check how you can manage this.

For example, will you have enough money to pay your historic VAT bill from the last quarter if no VAT is paid to you after 1st October 2019 under the new rules? Can you afford to pay your wages and PAYE bill if VAT is not flowing through your bank account after 1st October 2019?

If your services are within the scope of CIS and the reverse charge rules apply, the customer will not be allowed to pay you VAT after this date, so you must be prepared.  Your invoices will need to be in a new format that does not add VAT to the total amount due. If you do happen to invoice for VAT after this date, the customer is required to return the invoice back to you which will delay payment.

Invoices dated before 1st October 2019 can list VAT and can be paid with VAT. Invoices dated on or after 1st October 2019 will not show VAT in the amount payable.

We understand that this is a major change for everyone and therefore, Your Tax Shop recommend that you:

  • – Check whether the reverse charge affects either your sales, purchases or both
  • – Make sure your accounting software is updated to deal with the Reverse Charge
  • – Consider whether the change will have an impact on your cashflow
  • – Make sure all your staff who are responsible in accounting for VAT are familiar with the Reverse Charge and how it will operate
  • – Visit the Government’s website
  • – Think about whether you will need to be a Monthly Repayment Trader (complete and submit VAT returns monthly instead of quarterly).

Are you unsure whether the domestic reverse charge will impact your business or simply require some more help and advice? Get in touch with Your Tax Shop today on 0161 339 5689 or and see how Your Tax Shop, a multi-award-winning accountancy practice based in the heart of Ashton-under-Lyne, can help you and your business!