Major changes to construction VAT from 1st October 2019

Major changes to construction VAT from 1st October 2019

Now delayed until 1 October 2020

HMRC announced the delay on Friday 6 September.

Are you ready for big VAT changes affecting the construction industry from 1 October 2019? The changes are huge, but with all the noise about Making Tax Digital for VAT and Brexit, you might not have heard about them.

At first glance, the new rules seem like good news for VAT-registered construction businesses. You’ll no longer charge customers VAT, as they themselves will be responsible for paying it to HMRC. (Your invoices will still need to show how much VAT the customer will need to pay). However the changes could seriously affect your cashflow.

Is anyone exempt from the changes?

We expect most construction businesses to be affected by the changes. However the VAT Domestic Reverse Charge will not apply:

  • if your customer is not VAT registered
  • where customers are ‘end users’
  • for services supplied by ’employment businesses’
  • for supplies which are not subject to standard or reduced rate VAT.

If you are a mid-tier business, the change may affect both sales and purchase processes if you operate as both contractor and subcontractor.

The change will hit your cashflow, particularly if you use invoice finance or the VAT cash accounting scheme.

In broad terms, VAT received from your customers provides short term working capital for your business before you have to pay HMRC. If your construction business uses invoice finance (also known as factoring and invoice discounting), you can expect your cashflow to take an even bigger hit because you’ll typically receive this funding even earlier. In addition, if you use the VAT cash accounting scheme, you will no longer be able to do so. Again, this will significantly affect your cashflow.

We are working with a subcontractor who turnover approx £2m and use invoice discounting, and have advised them they are likely to require an additional £50,000 working capital.

What should I do now?

  1. Check the HMRC guidance / flowchart to find out if your business will be affected.
  2. Confirm that your customer’s VAT registration / number is valid. Check whether the reverse charge applies. Establish if your customer is an intermediary (likely for most builders / developers) or end user. The government advise you do this by using the European Commission website. (Like you, we are wondering what happens after Brexit!)
  3. Get your accounts system ready.  (invoices must show how much VAT the customer must pay under the reverse charge scheme and/or include the appropriate wording – see HMRC guidance).
  4. Consider if you should be moving to monthly VAT returns. From 1 October, many construction businesses will be in the position where they normally be reclaiming VAT rather than paying it to HMRC. Generally it’s better to make this change at the start of a new VAT quarter, rather than mid-way through.
  5. Update your cashflow forecast to check what impact the changes will have.

If you’d like help or advice about how the VAT Domestic Reverse Charge for Building and Construction Services will affect your business, please get in touch.

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