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These changes have been deferred, please click here to read more.

From 1 October 2019 a VAT reverse charge will apply in the UK to certain supplies of construction services, meaning that around 300,000 construction businesses will be required to change their accounting systems.

The reverse charge is being introduced in order to prevent trader fraud within the construction industry. It has previously been introduced for businesses in the tech industry, in particular, those selling mobile phones and computer chips.

The changes will mean that the buyer, rather than the supplier, will be liable to account to HMRC for the output VAT in respect of supplies of certain construction services. Put simply, this means you have to charge yourself the VAT that your supplier used to charge you and pay it to HMRC. In respect of the VAT that you have charged to yourself, you have to separately decide if you are able to reclaim the VAT as input VAT – in most circumstances, you should be able to.

A reverse charge will apply through the supply chain, up to the point where the customer receiving the supply is no longer a business that makes onward supplies of those construction services.

From a VAT perspective, you’ll have more admin work to do and there could be a cashflow impact but you will not be better or worse off financially. Although we don’t know all the details just yet, we think the potential impact could be:

  1. If you have mostly non-business customers, your VAT liability each quarter could increase significantly (though you will pay your suppliers less throughout the quarter as they no longer charge you VAT, improving cashflow)
  2. If your customers are predominantly other businesses that re-sell your work, you are likely to find your VAT liabilities are lower (or you can now obtain a refund) though you will receive less from your customer as you no longer charge them VAT, reducing cashflow.
  3. If your liability to VAT increases to the extent that your annual liability is in excess of £2.3m, you will be required to make payments on account each month for VAT (or start to file monthly VAT returns). This can be more onerous to operate for your business.

We will update you further as we learn more. Currently, it appears HMRC are preparing for Making Tax Digital and Brexit so it may be a while before more information is available.