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28 September 2018


HMRC has published draft legislation that aims to shift the VAT liability for construction work from the supplier to the customer from October 2019.

 Under normal VAT rules, when a sale is made VAT is charged by the supplier of the goods/services and then collected from the customer, and paid over to HMRC. However, due to an increasing number of failing businesses in the construction sector, HMRC are not always able to recover the VAT collected and they wish to mitigate their ‘exposure’.

To combat this, from October 2019 HMRC intend to implement a reverse charge system whereby a construction business that supplies goods/services to another construction business won’t charge any VAT on their sales invoice, but instead the customer will account for output VAT on their purchase, and then also reclaim the input VAT on their purchase. It is therefore an ‘in and out’ for the customer and no VAT changes hands.

Confused? Let’s consider an example. A plumbing business carries out work on a new school and invoices the main contractor £10,000. Under current rules it will invoice £10,000 plus 20% VAT, and will then collect £12,000 from the main contractor, and pay over VAT of £2,000 to HMRC on its next VAT return. However, under the new rules it will charge £10,000 but without adding VAT. The main contractor will account for £2,000 of output VAT on the supply under the reverse charge rules, and will then also reclaim the £2,000 as input VAT. This means that instead of the plumbing business paying £2,000 of VAT to HMRC and the main contractor reclaiming £2,000 of VAT from HMRC, no VAT changes hands at all. The logic is that if the plumbing business were to go bust then HMRC are not at risk of never recovering the £2,000 of VAT collected from the main contractor. Simple eh?!

These rules are only expected to apply to supplies made to/from businesses within the construction sector, and will therefore capture the same businesses that currently have to operate under the Construction Industry Scheme for direct taxes. It will not therefore apply if a builder does work for a domestic customer, or if a builder does work directly for a business not itself in the construction sector. In those cases VAT will still be charged as before.

While the legislation is still currently in draft form, the consultation period closed in July, and it is highly likely that these changes will go ahead. Rest assured that we’ll keep you updated, and we’ll be in touch with affected clients once the changes are confirmed.


Key Facts

1.HMRC has published draft legislation to bring reverse charge VAT into the construction sector
2.The changes will limit HMRC’s exposure to failing businesses in the sector
3.The new rules are expected to kick off on 1 October 2019
4.No VAT will be charged on invoices from one construction business to another
5.The customer will account for the output and input VAT on their VAT return

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