Stuart MacPherson: VAT changes in the construction industry

Stuart MacPherson, senior business services manager at Aberdeen-based chartered accountancy firm Meston Reid & Co, gives advice on VAT changes in the construction industry.

Stuart MacPherson: VAT changes in the construction industry

Stuart MacPherson, senior business services manager at Meston Reid & Co

A change to VAT collection arrangements is finally heading the way of the UK construction industry.

Implementation of the domestic reverse charge for building and construction services falling within the Construction Industry Scheme, which had been delayed twice, will be introduced on March 1.

Affected businesses will need to take active steps to ensure that their systems will be ‘fit for purpose’ and ready for the new scheme.

However, by ensuring they fully understand its terms and the specific measures they need to apply to achieve compliance, they can integrate it smoothly into their administrative processes.

The new system means VAT will not be applied through the supply chain until the end user is charged. Instead, the supplier accounts for the input tax that they would have been charged on both sides of their own VAT return. In other words, both output and input tax are adjusted so there’s no change in the overall cost if the business can reclaim all input tax.

One important clarification that has been made to the rules since the previous delay is that it is now the onus of a builder buying construction services to tell his own building supplier that he is an end user (or an intermediary supplier who is connected to the subsequent end user).

Designed primarily to address the risk of VAT fraud in specific industry sectors, the new system will only apply to supplies of building and construction services supplied at the standard or reduced rates of VAT that are partly or wholly covered by the existing Construction Industry Scheme (CIS). It will, however, apply to the entire charge.

One of the prime issues that businesses will need to anticipate is the potential impact on cash flow.

Smaller subcontractors often receive payment, including the input tax element, before the payment for the VAT quarter is made to HMRC. That cash flow advantage will no longer exist. HMRC has indicated that the delay had been implemented to give businesses more time to prepare, and we believe it’s critically important for businesses to understand the impact the changes will have in the respect of cash flow.”

It’s equally important for businesses to review their sales invoices, and for subcontractors and contractors to put a robust process in place for assessing whether work falls within the new domestic reverse charge regime. And it should be noted that HMRC have rules in place to prevent avoiding these rules through invoice splitting (invoicing materials and labour separately).

Companies also need to ensure that any accounting or CIS software is compliant with the new arrangements, which apply only to UK businesses.

This will be another significant change for the construction industry and, as ever, it’s important that businesses to which it relates are fully across its implications. If in any doubt, the best advice is always to seek assistance from finance professionals. Affected businesses should ensure that they are fully ready for the changes when they are implemented.

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