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How will the reverse VAT charge for construction work?

Stuart Datlen

From 1st October 2019 a VAT reverse charge will apply in the UK to supplies of construction services, this will mean that around 300,000 construction businesses will be required to change their accounting systems. 

The changes will mean that customers will be liable to account to HMRC for the VAT in respect of supplies of certain construction services, rather than the supplier, known as the ‘reverse charge.’ The customer will be required to pay the supplier for the services but the customer will also need to pay the VAT element direct to HMRC. A reverse charge will apply through the supply chain up to the point where the customer receiving the supply is no longer a business that makes supplies of construction services. Supplies between group companies will be excluded from the reverse charge. 

HMRC have said that the impact on business administrative burdens is expected to be significant. They have said that there will be one off costs to ensure that there is familiarisation with the new rules as well as adapting VAT accounting systems and processes to enable reverse charge supplies to be calculated and reported correctly. There are also ongoing costs to include calculating the reverse charge, keeping records of all reverse charge supplies, checking purchases are correctly treated and reporting reverse charge supplies on VAT returns.

The reverse charge is being introduced in order to remove the opportunity for missing trader fraud within the construction industry. It has previously been introduced for businesses in the tech industry, in particular, those selling mobile phones and computer chips. 

The government is expecting to raise an extra £100m from the reverse charge – which will see the customer, rather than the supplier account for the VAT direct to HMRC; making it impossible for trader fraud to be committed. 

The construction sector is a larger and more complex sector than most in the UK. The government estimates that around 300,000 businesses will be affected by this change, which is why the reverse charge has a long lead-in time, and will not take full effect until October 2019. 

A threshold was considered to make goods below a certain value exempt from the reverse charge, but the government decided against this as it would open loopholes for fraudsters to avoid the measure.

The reverse charge follows other measures the government has implemented to combat tax evasion such as the corporate criminal offence of failing to prevent the facilitation of tax evasion and the proposed changes to shift the PAYE compliance burden for off payroll contractors to the businesses that use their services.

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