Independent accountancy firm Kirby Williams is urging businesses in the construction sector to take notice and ensure they are well prepared ahead of VAT changes due to take place in October of this year.
Legislation has been introduced in a bid to close a VAT loophole, which HMRC says will save them £500 million over the next five years.
Presently, if a sub-contractor makes a supply of construction services to another VAT registered construction business, the sub-contractor will issue an invoice, which the business settles. The business reclaims the VAT paid as input tax and the sub-contractor pays over the VAT as output tax. Sometimes, when a business has paid the invoice and reclaimed the VAT, the sub-contractor does not pay the VAT as output tax to HMRC and so gains a cash advantage and HMRC can lose out.
The changes affect the way VAT is accounted for between VAT registered businesses in relation to VATable construction supplies that fall within the remit of the Construction Industry Scheme (CIS).
The new rules will come into effect on October 1, 2019. On or after this date, the business customer will pay output tax to HMRC and reclaim it in the same VAT return as opposed to a sub-contractor charging VAT, which is currently common practice.
The new rules will affect both services and goods supplied with construction services when there is a single supply. Businesses that are registered for VAT and receive CIS services but do not make supplies of building/construction services themselves are known as ‘end-users’. End-users and those connected to end-users are excluded from the changes.
As a result of the new legislation, there are a number of practical issues to consider for both sub-contractors and main contractors operating in the construction industry. Whilst the biggest impact will be on cashflow, additional thought needs to be given to invoicing requirements, staff training on the rules, adaptations to the accounting software, identifying customer status, treatment of mixed supplies, amending contracts and the interaction with self-billing.
Mary McDonagh, a partner at Kilsby Williams, said: “It’s really important to us that affected businesses are prepared for these changes.
“We invite anyone who would like advice or help reviewing their business transactions to get in contact with us at Kilsby Williams. We can help identify the changes that construction businesses may require in order to comply with the new domestic reverse charge and ensure businesses are aware of how it affects them.”