If you work in the construction industry, 1st October 2019 may herald an important shift in the way you account for VAT. Andy Turner – Partner at accountancy firm Mark J Rees – spells out exactly what you need to know.
For a long time, the government has been considering ways to plug a perceived gap in the VAT collection system within the construction industry. A new set of regulations comes into force this autumn for standard and reduced-rate supplies, which will have an impact in situations where a sub-contractor is doing work for a contractor and both parties are VAT-registered.
What exactly is the change?
A system of reverse charging is being introduced and here's how it works:
If you're a sub-contractor, complete your VAT form as before, but DON'T include the output VAT in Box 1 of your return.
You must write the words 'reverse charge' on any invoice, but don't include any amount for VAT in your bill. The customer is going to account for the equivalent amount of VAT instead. You must state that amount on the invoice, but it is described as a 'narrative' and is NOT part of any total or calculation.
Unless otherwise agreed with HMRC, the amount of VAT to be accounted for under the reverse charge should be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.
If you produce invoices using an IT system, and that system cannot show the amount to be accounted for under the reverse charge, then the wording should state that VAT is to be accounted for by your customer at the standard rate of VAT, based on the VAT-exclusive selling price for the reverse charge goods or services.
If you're the customer, you must show this reverse charge in Box 1, as well as input VAT in Box 4.
Do NOT include the sale in Box 6, but still show the purchase in Box 7.
In what circumstances do these new regulations apply?
They apply in relation to 'construction services' and the associated materials.
You must also apply these new rules in situations where you're only supplying labour.
In what circumstances do these new regulations NOT apply?
If you are invoicing the end-customer directly, you should NOT follow the reverse-charge policy and should include VAT in the normal way on your invoice.
If you're only supplying materials, the reverse-charge rules do NOT apply either.
Does this mean that different invoices may require different approaches?
Yes. You might work as a sub-contractor for a VAT-registered contractor, but also be doing work for members of the public. In the first case, you need to apply the reverse-charge principle, but when dealing with the end-customer, you charge the VAT as normal.
Are some supplies excluded from the new rules?
Yes. There are exclusions. It's worth checking with your accountant whether any of them are likely to apply to you in the work that you do.
Should sub-contractors still use the Flat Rate VAT Scheme?
It's possible you may be disadvantaged as a sub-contractor, if you stick to the flat-rate scheme. So that's something worth discussing with your accountant too.
Should sub-contractors file monthly VAT returns?
If you get regular VAT repayments, it may well be worth switching to monthly returns.
What else should sub-contractors keep in mind?
You're expected to take reasonable steps to ensure that your customer is genuine. Is their VAT number bona fide, for instance? Are they credit-worthy? That way, you can have confidence that they will pay the reverse-charged VAT over to HMRC.
Now's the time to start thinking about these changes and how they will affect you. The 1st October start date will be here sooner than you think, so why not open up a discussion with your accountant now and get ahead of game?
If you have any concerns about accounting for VAT after 1 October Andy will be pleased to help and can be contacted by email email@example.com.