The Domestic Reverse VAT Charge and You

Sunday May 12, 2019

If you’re in the building trade, you might have heard some noise about the new “reverse VAT” system coming in. You’ve always had to know the rules to stay safe in the taxman’s world – and now you’re going to have to know them backwards. Here’s a breakdown of what’s happening.

What’s the new “reverse VAT” rule?

The so-called Domestic Reverse Charge is a big shake-up in the way construction contractors handle VAT. Basically, you won’t be charging VAT in your sales invoices when you’re dealing with another contractor. Instead, your customer will report both what they’ve bought (the input VAT) and your sale (the output VAT) in their own VAT return. This can get hectic fast, since a lot of companies and contractors are going to be classified differently on different jobs. That means you won’t always be sorting your VAT out the same way once the new system kicks off on the 1st of October.

Why is this happening?

In a nutshell, this is all part of HMRC’s sledgehammer crackdown on tax fraud in the construction game. Specifically, they’re chasing the £100 million they reckon they’re losing every year to the “missing trader” scam.

Here’s how the scam works. When one contractor pays another, they charge VAT on the labour or services they provide. That cash, obviously, is supposed to go to HMRC. However, instead of forking it over, the trader basically “vanishes” with the money. Sometimes, they pop up later under a new name or with a different set-up, making it tough to force them to pay up. HMRC’s tried before to stamp this out through things like security deposits, but nothing’s worked. Instead, they’re now saying that contractors generally won’t be able to charge VAT at all, shifting the job onto the customer. For what it’s worth, this isn’t really a new idea. There have been Domestic Reverse Charge systems all over the EU for everything from microchips to mobile phones for years.

Who will this affect?

The first thing to understand is that “end users” won’t have to worry about the Domestic Reverse Charge. The new regulations will only apply to transactions made inside the main “chain of supply”. It also won’t count for zero-rated charges, naturally enough, or make anything more expensive for the customer. They’ll just be sending the VAT to HMRC instead of their supplier, and recovering it in the usual way.

Of course, supply chains can be complicated in construction. It may not always be completely clear who the end users really are. Worse still, in these fuzzier cases, it’ll be up to the end users to prove themselves, otherwise they’ll be coughing up VAT.

As for who the new system does apply to, it comes down to “construction operations” that work under the infamous Construction Industry Scheme (CIS). Construction operations include things like groundworks, alterations, repairs and power system installation. However, services like architecture and surveying won’t be covered.

If you are affected, you’ll need to make some changes to your VAT paperwork. That means declaring that the Domestic Reverse Charge applies, its value, the applicable rate and the VAT due.

How much trouble is this going to cause me?

HMRC has said they’re going to take a fairly “light touch” approach in swinging this particular sledgehammer – at least at first. After 6 months, though, they’re going to be coming down hard on contractors they suspect aren’t playing by the rules. There’s not a whole lot of guidance floating about on how to handle it all yet, so it’s worth getting advice on staying out of harm’s way. Likely trouble spots, for example, include:

  • Finding out too late that you’ve paid VAT to a subcontractor that you should’ve paid to HMRC. You probably won’t be seeing that cash again.
  • Not declaring that you’re an end user in tricky cases, and getting stuck paying the charge.
  • Not realising that the reverse charge should’ve applied in the first place - or failing to charge VAT because you thought it did when it didn’t.

So here’s the good news in all of this: if you’re with RIFT Accounting, we’ve got you covered. We’ll be taking care of Domestic Reverse Charge issues for all our construction clients as part of our service. What’s more, if you’ve got any questions about the new regulations, you can come to us at any time.

There’s already a ton of upheaval in the building game right now, with Making Tax Digital changing the rules. More than ever, you’ll need to keep a tight grip on your cash flow – especially if you’re used to factoring your customers’ VAT payments into it. Again, though, RIFT is always here to keep your business safe and thriving. Get in touch with your questions, concerns or problems – and listen out for more Voices from the RIFT…

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