Under new rules, from 1 October 2019 supplies of standard or reduced-rated building services between VAT registered businesses will be invoiced using the "reverse charge" mechanism (RC). Using the RC, the main contractor will have to account for the VAT on services provided by any sub-contractor. VAT-registered businesses who currently buy goods or services from suppliers in other EU countries may already be somewhat familiar with the RC, albeit in a different scenario.
It is intended that the RC will only apply to construction businesses which make a further supply of building services - not to end users e.g. private individuals. There will be no de-minimis limits.
The type of work affected may include not only 'construction' in the literal sense, but also other activities such as alterations and repairs, installation of light, heat and power systems, painting and decorating, civil engineering, site clearance, excavation and foundation work - basically the same areas of work that fall within the CIS legislation. Some areas of work will be unaffected e.g. the supply of professional services such as surveyors, architects and consultants.
The proposals are likely to place a significant burden on contractors throughout the supply chain, who from October 2019 will have to identify whether the RC should apply to each individual transaction and account for and report the VAT accordingly. HMRC will happy collect output VAT that has been incorrectly charged, but without allowing the recipient of the supply to recover the associated "input VAT".
The final version of the draft legislation is intended to be published October 2018, to give the construction an industry a full year to get its systems and procedures in place to cope with the RC.
Should you require assistance or wish to discuss this in more detail, contact us today.