The Government’s plans to tackle VAT fraud in the construction industry by introducing a domestic ‘reverse charge’ VAT scheme for construction services will come into effect on 1 October 2019. The HMRC Consultation Outcome was published on 1 December and there will be a technical consultation on draft legislation in spring 2018.
What does this mean in the supply chain?
As an example, the main contractor who owes a subcontractor £100 plus VAT £20 will only pay them £100 and will pay the VAT straight to HMRC. The subcontractor will, therefore, receive only 83% of the actual cash into their bank account. Although they won’t have to pay as much VAT to HMRC as they do now, there won’t be the funds swilling about to keep going in an hour of need. VAT owed to the Government is often used by firms to keep afloat.
It’s not just main contractors and major subcontractors who will be affected – everyone paying anyone else for work done who is not the end consumer of the service – a customer – will be required to reverse charge VAT.
The whole business of invoicing for work done and what VAT to show on an invoice, who determines the rate of VAT due on a supply and how we all communicate the rates to be used, will be up for grabs.
All accounting software used in the industry will have to change. In addition, we will all be ‘Making Tax Digital’ and getting our accounting packages to report quarterly at the same time.
It is going to be a difficult couple of years for the IT, tax and accountancy specialists in construction.