Businesses involved in buying and selling construction services will be affected by new rules being introduced from 1 October 2019.

Contractors charging other contractors for qualifying services will no longer be required to add VAT to their invoices. Instead, they will notify the customer that they are liable to account for VAT on the supply received. Details of who will be affected by the new rules are explained in detail in our previous article.

Using this flowchart you can see how you would decide whether to apply normal VAT rules or apply the domestic reverse charge.

 

In this this article we aim to provide some more practical guidance for businesses that are affected.

Invoicing

  • When making a supply to which the domestic reverse charge applies, suppliers must:
    show all the information normally required to be shown on a VAT invoice
  • annotate the invoice to make clear that the domestic reverse charge applies and that the customer is required to account for the VAT

The amount of VAT due under the domestic reverse charge should be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.

Tax points

For supplies spanning 1 October 2019 that are liable to the domestic reverse charge, the VAT treatment will be as follows:

  • for invoices with a tax point before 1 October 2019, the normal VAT rules above will apply, and you will charge VAT at the appropriate rate on your supplies
  • for invoices with a tax point on or after 1 October 2019, the domestic reverse charge will apply

Completion of the VAT Return

Suppliers
Suppliers of goods or services under the domestic reverse charge must not enter in box 1 of the VAT Return any output tax on sales to which the domestic reverse charge applies but must enter the value of such sales in box 6.

Customers
Customers must enter in box 1 of the VAT Return the output tax on purchases to which the domestic reverse charge applies but must not enter the value of such purchases in box 6.

They may reclaim the input tax on their domestic reverse charge purchases in box 4 of the VAT Return and include the value of the purchases in box 7, in the normal way.

Cash flow impact

This new provision potentially brings about a cash flow saving for contractors receiving services from subcontractors but conversely has potentially has detrimental cash flow impact for the subcontractors.

These new provisions will only apply where the customer of one contractor is another contractor.

That is to say, a contractor dealing directly with the party owning the property, whether they are a business such as a property developer or a private individual, will continue to charge VAT in the normal way.

The cash flow advantage accruing to contractors will therefore not arise for developers.

This is not altogether a bad thing, as many developers are partly exempt for VAT purposes and might not be able to claim back at least some of the output tax they would have to account for under the reverse charge.

More details

More detailed guidance can be found here: https://www.gov.uk/government/publications/vat-reverse-charge-for-building-and-construction-services/vat-reverse-charge-for-building-and-construction-services

If you require further advice on this point please contact Mitchells at: consult@mitchellsaccountants.co.uk or call us on 01246 274 121