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VAT Domestic Reverse Charge for Building and Construction Services

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Following an announcement made by HMRC earlier in the month to extend the date for the implementation of the VAT Domestic Reverse Charge for Building and Construction Services until 1st October 2020, we thought it prudent to clarify the impact this will potentially have on accounting practices for  businesses operating in the construction sector.

Firstly, what is the VAT Domestic Reverse Charge For Building & Construction Services and who will it affect?

HMRC has introduced the VAT domestic reverse charge for building and construction services initially due to be enforced from the beginning of next month. However, after much controversy the deadline has been extended and will now not be enforceable until October 2020 there remains no transitioning period.

The new VAT reverse charge rules will impact certain Construction Industry Contractors, Trade Contractors and Subcontractors with the aim to defend against on-sale fraud in the construction sector. VAT-registered Contractors who supply construction services to another VAT-registered business will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge.

The business in receipt of the services must declare the VAT due on that supply to HMRC via a VAT return  instead of paying  the amount directly to the contractor. In short, the ‘customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier’.

HMRC guidance sets out what you need to do to be ready for the start of the domestic reverse charge which includes [1]:

  • checking whether the reverse charge affects either your sales, purchases or both
  • making sure your accounting systems and software are updated to deal with the reverse charge
  • considering whether the change will have an impact on your cashflow
  • making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

What contractors need to do

If you’re a contractor you’ll also need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts. You’ll need to notify your suppliers if it will.

What sub-contractors need to do

If you’re a sub-contractor you’ll also need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end user or intermediary supplier.

Further guidance and a comprehensive list of construction services affected and those exempt can be found here.

1 What you need to do to be ready for the start of the domestic reverse charge