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Major VAT change for building and construction sector

A major change in the way that VAT is accounted for in the building and construction sector which will take effect later this year may cause chaos.

The warning comes from the Federation of Master Builders (FMB) which says that the VAT domestic reverse charge for building and construction services, which applies from 1 October 2019 is an anti-fraud measure.

Invoicing and VAT returns

It will be an administrative change, impacting invoicing and VAT return procedures. With a reverse charge, a VAT-registered recipient of servicesaccounts for VAT, rather than the supplier.

The rules will apply to VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS).

The charge will be used along the supply chain, until the recipient is no longer a VAT-registered business making an onward supply of specified construction services.

Suppliers (or the VAT-registered subcontractors), will have to clearly state on their invoices that supplies are subject to the reverse charge.

Contractors will then use their VAT returns to account for output VAT on supplies received, instead of paying output VAT to their suppliers.

The contractor can reclaim VAT on supplies received as input tax, usually leaving no net tax payable on the transaction, subject to normal VAT rules.

Supplier VAT charges

Where there is an ‘end user’, it will be expected to provide notification of end user status to suppliers, signalling that a supplier should charge VAT as usual.

Reverse charge will not affect zero-rated supplies:nor some circumstances where suppliers are connected to end users, for example landlords and tenants.

Specified services

The reverse charge covers ‘specified services’– essentially construction services as defined for CIS purposes.

Where services – such as those of architects, surveyors and some consultants – are supplied on their own, they are not covered by the reverse charge.

If supplied along with supplies subject to the charge, the whole supply will be subject to the charge. The reverse charge also includes goods, where supplied with specified services.

Not prepared

The FMB are warning that the government has not properly preparedthe construction industry for this major VAT change. New data from FMB shows that:

Brian Berry, Chief Executive of the FMB, said:

“The guidance is not user-friendly and even tax experts are scratching their heads over it.’

“It’s therefore not surprising that the vast majority of construction SMEs are not aware of the impending changes, despite widespread promotion by the FMB.

“Small business owners are busy people and clearly they don’t have time to read everything we send them.”

Julie Williams, Director at the Hollies, said many construction SME’s were waiting for guidance to be published that has only just emerged.

She said:

“The FMB is calling on the Government to delay the changes by another six months and to use the extra time to improve the guidance and work with them to undertake a more intensive communications campaign.

HMRC should also consider holding workshops across the country to explain the changes.”

Businesses affected by the new rules are recommended to plan now to adapt accounting and IT systems.

The reverse charge may also impact business cash flow. Please do get in touch with us here at The Hollies on 01743 790086 as we work to stay on top of these changes for you.