VAT changes to the Construction Industry – Reverse Charge

VAT changes to the Construction Industry – Reverse Charge

Category : News

From 1st October 2019, the way VAT is charge on transactions between businesses within the construction industry is due to change dramatically.

Under the current rules, the supplier will charge VAT on their invoices at the prevailing rate. The customer will then pay this VAT inclusive invoice to the supplier with the VAT element being paid to HMRC when the supplier completes their VAT return.

The government and HMRC often foot the bill when the supplier goes into liquidation. This is because the customer will have reclaimed the VAT on their VAT return, but the supplier will not have paid HMRC the VAT it has collected, thus the government losing out – a recent example of this being Carillion.

Changes from 1st October 2019
From 1st October 2019, the supplier will no longer charge output VAT to the customer. Instead, the supplier will account for the VAT on their own VAT return. The Output VAT will go in the return as normal, but under the reverse charge design, there will be a corresponding entry in the VAT return as input VAT meaning that the net position of the supplier is £nil

The customer hasn’t paid any VAT to its supplier and therefore, there is no VAT to reclaim from HMRC – as a result, HMRC have less exposure when a construction business goes into liquidation.

Will these changes affect you?
The impending changes will only apply to business to business (B2B) transactions which are VAT registered. The services caught by the reverse charge include;

  • Construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations;
  • Painting or decorating the internal or external surfaces of any building or structure;
  • Installation in any building or structure of systems of heating, lighting, air-conditioning,
  • Ventilation, power supply, drainage, sanitation, water supply or fire protection;

Therefore, if your services are within the Construction Industry Scheme (CIS) you will tend to be caught by these rules.

Impact on your business
Overall, there will be little impact, the main consequence you may want to consider is cash flow.

As you will not receive the VAT from your B2B transactions with your customers, your cashflow might deteriorate. But on the other hand, you will not have to pay VAT on any of your B2B transactions with your suppliers – as a result, it is unlikely to have a material effect on your business.

If you do think your cash flow will be negatively affected, you can always elect to complete your VAT returns on a monthly basis if you believe you will now be in a VAT repayment position on a regular basis.

If you have any questions regarding the above, please do not hesitate to contact Adam.


“Great service! Fast, promptly and with a great knowledge about the taxes. I would highly recommend them!”
Adrian Pricop, director of Ara Trans Ltd

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