New VAT rules for Building Firms
In just over six months, builders, contractors and other trades associated with the
building industry will have to get to grips with a new way of accounting for VAT.
Essentially, building firms will be required to charge themselves VAT when they
buy building related services from other firms. This is referred to as a 'reverse
Subcontractor A undertakes groundwork services for contractor B. Currently firm
A charges VAT at the appropriate rate on the invoice it issues to firm B, B pays
the VAT to A and A pays it to HMRC.
From 1 October 2019 under the reverse charge rules, subcontractor A issues an
invoice to contractor B stating that its services are subject to a reverse charge,
so A does not charge VAT. Firm B adds VAT to the cost of the work undertaken
by A and includes this as output tax within its own VAT records. B claims the
same amount of VAT on the same return as input tax, meaning there is no net
payment due to HMRC.
This new reverse charge will not apply if contractor B is the 'end user' who will
sell the newly completed building to the final customer. It also does not apply
for transactions between connected companies (eg within a group of commonly
owned businesses) or where the supplier and customer are landlord and tenant.
If the services concerned would be zero-rated for VAT purposes, the reverse
charge is not relevant.
To prepare for the reverse charge you should check whether your regular customers
are VAT registered and record their VAT numbers. Also enquire whether your
customer would be an end user in the supply chain.
We can help you check whether your accounting software will cope with this new
reverse charge alongside the requirements for MTD which come into effect from
1 April 2019.