A new VAT domestic reverse charge is set to be introduced for building and construction services on 1st October 2020.
If you are unsure what this is or whether it will affect your business, we have put together some information to explain it in more detail…
What it is the new reverse VAT charge?
In an attempt to reduce VAT fraud, the government is introducing changes to how VAT is paid on certain services. If a customer receives services that fall under the reverse charge, they will pay tax directly to HMRC rather than to the supplier.
When do the new rules come into force?
The reverse charge changes come into effect on 1st October 2020.
Who will the reverse VAT charge affect?
Reverse charge VAT will affect you if you supply or receive services that are reported under the Construction Industry Scheme (CIS). Under the CIS, contractors currently deduct money from a subcontractor’s payments and pass it to HMRC. These deductions count as advance payments towards the subcontractor’s tax and National Insurance.
With the new domestic reverse charge rules, the customer receiving the service will pay the VAT due to HMRC instead of paying it to the supplier.
What do you need to do?
If you are a contractor you will need to review all contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive. If it does apply, you will need to notify your suppliers.
If you are a sub-contractor you will need to contact your customers to find out whether the reverse charge will apply – including confirmation of whether the customer is an end-user or intermediary supplier.
Magpie Accountancy’s advice
Implementing the reverse charge may cause some businesses difficulties and HMRC has confirmed that as long as businesses are trying to comply with the new legislation, they will apply a light touch in dealing with any errors made within the first 6 months. Penalties will only be considered if businesses are deliberately taking advantage of the measure by not accounting correctly.
Businesses will need to confirm the status of their customers. A practical way of dealing with this is for the business to update their terms and conditions to include a statement to say they will assume their customer is an end-user unless they say otherwise. This places the responsibility on the customer to respond if this is not the case.
You should always ask new customers to provide details of their registration as a contractor for CIS purposes, or a copy of their CIS verification of you, and retain these.
If you would like more in-depth information on this subject please get in touch with Magpie Accountancy.