What is the reverse charge on VAT? Will it affect you?
From the 1 October 2019, CIS registered businesses which are also VAT registered will have to withhold the VAT element of an invoice when paying those suppliers which are also CIS and VAT registered. The withheld VAT must then be paid over to HMRC on the next VAT return.
The way that VAT is treated on building and construction invoices will completely change from 1 October 2019. The introduction of the domestic reverse charge means that the CIS and VAT registered customer receiving the service will have to pay the VAT on a supplier’s invoice straight to HMRC
HMRC has said it will operate a ‘light touch’ penalty system in the first six months from implementation to allow for any teething issues in interpretation of the new rules.
‘HMRC understands that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first six months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.
‘Any errors need be corrected as soon as possible, as the longer under declared or overcharged sums remain outstanding the more difficult it may be to correct or recover them.
‘HMRC officers may assess for errors during the light touch period, but penalties will only be considered if you are deliberately taking advantage of the measure by not accounting for it correctly.’
The sector will face issues transitioning to the new rules as all ongoing contracts will need to be reviewed to determine whether the reverse charge will apply half way through a project.
‘To avoid uncertainty and delay to payments whilst each contract is checked, HMRC recognises that it will be easier if one VAT accounting treatment is given to all contracts with a particular sub-contractor,’ said HMRC.
Sole traders, partnership and companies
The reverse charge will affect sole traders, partnerships and companies registered for VAT in the UK if they supply or receive services and supplies at standard or reduced VAT rates that are reported under the CIS. It will not apply to individual consumers or ‘end users’ of building and construction services.
There is a crucial difference between CIS and the reverse charge, where materials are included in a service. The reverse charge will apply to the whole service whereas CIS payments to net status sub contractors are apportioned and no deductions are made on materials content.
‘If any of the services in a supply are subject to the reverse charge, all other services (even if that service would be excluded if it were being supplied as a single service) will also be subject to it,’
The reverse charge does not apply if the service is zero rated for VAT or the customer is not registered for VAT in the UK.
There are a number of exemptions to the reverse charge rules including:
- Interior & exterior decoration
- Landscape consultants
- Security system installation engineers
As a result of these changes, some businesses may never need to pay VAT over to HMRC and indeed may become repayment only. In this case, affected businesses can apply to move to monthly returns to speed up amounts due from HMRC.
If you have any questions or worries about how this may affect you or your business, please do get in touch with Melanie Richardson using the contact details below:
Tel: 01825 763366
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