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Proposed changes to VAT and CIS for the construction industry

From October 2019, proposed changes to VAT and the CIS are cbeing planned within the construction industry. The Construction Industry covers a vast and wide-ranging sector of business in the UK and often includes a supply chain of providers, contractors and sub-contractors

What is the government proposing?

In the Spring of 2017 the government announced that it would be consulting on proposed changes to way VAT is charged in the Construction Industry to reduce the likelihood of fraud in VAT and the CIS. Following extensive consultation within the sector, the proposal has been agreed that a domestic ‘reverse charge’ will be introduced with effect from October 2019 and will generally cover all invoices that fall within the CIS.

The idea is that it will simplify the charging and recording of VAT and reduce the fraud possibilities that may arise through unscrupulous traders operating VAT illegally.

What is the Reverse Charge and how does it operate?

Basically what it means is that in the entire supply chain, VAT is only actually paid by the end customer. All other invoices are issued within the reverse charge system and no VAT actually changes hands.

What are the pros and cons?

The positive element of this is definitely the reduction of the potential for fraud and the assurance that HMRC will receive the full amount of VAT due.

The main drawback will be the effect on the cash flow of the smaller businesses that operate at the bottom end of the supply chain. Remember, that such businesses are likely to have tax deducted under the CIS scheme and also, many use the VAT received from issuing sales invoices to aid them with their cash flow in the short term until the VAT has to be paid to HMRC. Under the reverse charge scheme they will not receive the VAT and hence may fall short in cash requirements.

Many respondents to the consultation pointed out various issues to do with the cost of training, possible software implications and the requirement for a long lead in time to implement the changes.

There were also questions raised about the level of VAT registration, whether the smallest of businesses should be exempt from the reverse charge and the possibility of errors whilst the system becomes embedded.

A discussion also took place about businesses that are on the flat rate scheme and how this will affect the invoices.

As a final point is was noted that it is sometimes very difficult to determine who the final customer actually is and hence at which point in the supply chain VAT will actually be charged – the list of questions goes on.

This is quite a complex change to the treatment of VAT inside UK borders and The Hollies Bookkeeping will keep you in the loop as further information is released, but if you wish to read the full response to the consultation it can be found here.

Please contact us if you have questions about these proposed VAT changes and how they might affect you.