Reversing the VAT charge
A domestic VAT reverse charge is being introduced on certain building and construction services from 1 October 2019, making the customer accountable for VAT of purchases rather than the supplier. It is expected that supplies between sub-contractors and main contractors will be most impacted by this change.
HMRC brought in the change as a way to reduce the current levels of ‘missing trader fraud’ – a missing or defaulting trader who deliberately fails to pay its VAT liability for taxable supplies made in the UK. The new anti-fraud initiative will minimise the risk, with the aim to identify and expose specified serviced and liability of construction services.
Assessing the impact
The government policy paper states that it is expected to impact around 150,000 businesses in the construction and business sector, as an initiative to remove VAT fraud from supply chains and level the playing field for businesses.
The measure is not expected to have any significant macroeconomic impacts, apart from one-off costs, which include the familiarisation with the new rules, and adapting VAT accounting systems and processes, enabling reverse charge supplies to be calculated and reported. The business administrative burden, however, is expected to have a significant impact because of the amount of businesses affected.
The categories of construction services affected by the VAT changes will include general construction, groundwork construction, renovations and maintenance services, HVAC (heating, ventilation and air-conditioning), cleaning services and painting and decorating of buildings and structures.
Areas that will be excluded are zero-rate supplies, certain supplies between connected companies, certain supplies between landlords and tenants, services provided by architects, surveyors and other consultants, the manufacture of certain building or engineering equipment, burglar alarms, CCTV and PA systems.
During the consultation process, HMRC worked with trade associations in an effort to ensure that all those within the sector are fully aware of the impact of the changes, with a particular focus on small businesses. According to the policy paper, support – including guidance – will be available for all businesses that could be affected by the reverse changes during the lead period. HMRC will operate a light touch for genuine mistakes and penalties for a six-month period.