The domestic reverse charge for VAT comes into effect for the construction industry on 1 October 2019, as we explained in our newsletter on 13 June 2019.
However, many smaller building firms are unaware of this huge change to VAT administration. The Federation of Master Builders (FMB) has found that 69% of their members haven’t heard of the VAT reverse charge, and of those who were aware of it, only a third had started any preparation.
Here are four steps to work through.
- Check whether the reverse charge affects some or all of your sales.
The reverse charge applies to the full value of the invoice, not just the labour element as CIS does. Most building services are covered by the reverse charge except for professional services of architects and surveyors. Check the list in the HMRC guidance.
Only VAT registered firms are affected by the reverse charge. Some builders whose turnover is under £85,000 register for VAT so they can reclaim VAT on purchases. This decision needs to be reviewed urgently.
- Perform a cash flow analysis to see how the reverse charge will affect you.
From 1 October 2019 subcontractors will no longer charge VAT on their invoices to contractor firms, but they will need to reclaim VAT on purchases. This is likely to make their VAT returns repayment cases, which may impact their cash flow. The business may need to apply for a temporary loan to cover the period until the VAT is repaid. Alternatively, you could change to making monthly VAT returns, if you can cope with the extra deadlines.
- Review the accounting system and make sure software updates will cope with the reverse charge.
Not all software suppliers have got to grips with the domestic reverse charge as they have been concentrating on MTD. All software updates need to be tested before October.
Firms which use the flat rate scheme will almost certainly have to leave that scheme before 1 October, as it will not be beneficial to pay VAT to HMRC on invoices where VAT has not been charged.
- Train your own staff in how the reverse charge will operate and how to ensure the correct information is input into accounting software.
Staff need to be confident that they understand when the reverse charge applies, and when it doesn’t. To apply the reverse charge (ie not charge VAT on their invoice) they need to check that their customer is VAT registered and the VAT number is valid. This information can be collected for regular customers before October. Please contact this office if you need any help in this regard.
Written by the Tax Advice Network