Businesses reporting under CIS and VAT registered will have to pay VAT directly to HMRC instead of to the supplier when paying invoices for services provided across the construction and building sector when the reverse charge comes into force this autumn.
In a complete overhaul of the way VAT is payable on building and construction invoices, the introduction of the domestic reverse charge from 1 October 2019 means that the customer receiving the service will have to pay the VAT owed straight to HMRC instead of paying the supplier if they report under the Construction Industry Scheme (CIS).
HMRC will operate a light touch penalty system in the first six months of operation to allow for initial implementation issues over interpretation of the new rules. The HMRC guidance stated: ‘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 major complications over the transition period, when all ongoing contracts will need to be reviewed to assess whether the reverse charge applies mid-way through the 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,’ HMRC said.
The reverse charge will affect individuals, sole traders and businesses registered for VAT in the UK if they supply or receive specified services and supplies at standard or reduced VAT rates that are reported under the Construction Industry Scheme (CIS). It will not apply to individual consumers or final customers of building and construction services.
There is an important difference between CIS and the reverse charge where materials are included within a service. The reverse charge applies to the whole service whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the 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 guidance stated. The reverse charge does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK.
There are a number of exemptions to the reverse charge rules, including architects, surveyors, interior and exterior decoration and landscape consultants, and security system installation engineers.
As a result of the reverse charge some businesses may find that, because they no longer pay the VAT on some of their sales to HMRC, they become repayment traders (their VAT Return is a net claim from HMRC instead of a net payment).
Repayment traders can apply to move to monthly returns to speed up payments due from HMRC. The best time to move to monthly returns will depend on the business and whether they want to have monthly returns from October, or to delay a little to offset some of the VAT they owe to HMRC on periods spanning 1 October.
For example, if a customer submits a quarterly return up to 30 September 2019 and requests a change to monthly returns on 14 November 2019, October will be a monthly return and the return periods from then on will be monthly.
If the request is made in December 2019, October and November would be a 2 month return with monthly returns from then on.
You can read HMRC's official guidance advice here