If you are a businesses involved in the supply of construction services, from 1st October 2019, you will need to change how you account for VAT. This is when the Construction Services Domestic Reverse Charge (CSDRC) is introduced, VAT expert John Craig takes a closer look.
If you are a supplier making a supply of services that are liable to the reverse charge, you will still need to issue VAT invoices but will not declare and pay VAT to HMRC. Instead your customer will become responsible for accounting for VAT by making a reverse charge, unless the customer is an end user of the services.
The Construction Services Domestic Reverse Charge (CSDRC) has nothing to do with private households, it is domestic only in the sense that it applies to transactions wholly made within the UK. The new regulations are intended to counter ‘missing trader fraud’, where a trader reclaims input tax on purchases an amount of VAT that the supplier has no intention of ever paying over to HMRC.
The key points of CSDRC
From 1st October 2019, a person supplying certain construction industry services to a VAT-registered customer will no longer be required to account for VAT. Instead the customer will account for VAT under a reverse charge arrangement. This means that the customer will account for VAT as if he had made the supply to himself and if appropriate, recover the same VAT as input tax. The effect is to remove any risk that there may be deducted as input tax an amount which has never been paid over as output tax.
The CSDRC applies only to supplies which would otherwise be subject to VAT at the standard or reduced rate. It does not apply to zero-rated supplies or supplies made by someone who is neither registered nor required to be registered for VAT.
The CSDRC applies only to services that are made to a contractor, it does not apply to an end-user customer. However, there may be situations when this rule may be relaxed where both parties agree. Further guidance is due to be published by HMRC in the coming months.
Unlike some other ‘reverse charge’ schemes, amounts accounted for under the CSDRC will not count towards the VAT registration limit.
Contractors will no longer suffer a delay between paying out VAT and recovering it, since both will now be dealt with on the same VAT return.
Construction services may be charged VAT at different rates dependent upon what work is being undertaken i.e. 20%/5%/0%. The onus will now be on the contractor to verify the correct rate to be used for the reverse charge, or if is to be used at all.
Before agreeing not to charge VAT on a taxable supply, a supplier of ‘construction services’ will need to be satisfied that the supply falls within the CSDRC, in particular that the customer is a VAT-registered contractor and not an end-user
Which supplies are affected by CSDRC
The supplies which will be covered include but are not limited to:
• Construction, extension, demolition, alteration or repair of buildings or of any works forming part of the land.
• Installation in any building (whether or not in the course of construction) of a heating, lighting, air conditioning, power, water, drainage system.
• Internal cleaning of buildings, that is carried out in the course of construction.
• Painting or decorating the internal/external surfaces of a building.
Which supplies are excluded from CSDRC
Supplies which are excluded include but are not limited to:
• Manufacture of components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection.
• Professional services of architects or surveyors, building consultants and so on.
• Installation of blinds and shutters.
• Installation of security systems.
In the first six months following implementation, HMRC will apply a light touch in dealing with errors, where businesses are genuinely trying to comply with the new legislation. However, where businesses knowingly fail to account for the reverse charge when it should have been due, penalties may be due.
How we can help
Businesses must comply with the new legislation when it is introduced in October 2019 and if a business knowingly fails to account for the reverse charge when it should have been due, penalties may be due.
JRW can work with you to review your business transactions to determine whether the CSDRC does indeed apply and, if applicable, determine the changes which may be required to your systems to comply with the revised rules.
As ever please don’t hesitate to get in touch with one of the team to discuss the implications of CSDRC and to receive the best advice for your business.