Everyone here at AVS VAT is excited to be exhibiting at Professional Accountancy 2019 at the NEC in September and expect to be spending a lot of time talking about the new rules being imposed on construction supplies from October.
In the nutshell – The new reverse charge is intended to work as a fraud prevention measure by some suppliers no longer having to charge VAT to their customer and instead the customer has to account for VAT effectively on the supplier’s behalf. The customer charges themselves VAT on the supplies received and then reclaims (often) the same amount of VAT. The customer will suffer a real costs if their VAT claims are restricted, for example under the partial exemption or non-business rules.
The new rules introduce the concept of “end users” and “intermediary suppliers” and will apply where standard or reduced-rated supplies of building and construction services are made to VAT-registered business who, in turn, also make onward supplies of those building and construction services (“intermediary suppliers”).
VAT will continue to be documented and accounted for under normal rules where the supply is to an end user i.e. all B2C supplies plus some B2B supplies. It is possible for a business customer to be an end user on one project but not on another so the new rules bring several mantraps into play.
There is a close tie-in between supplies under the new rules and those that have to be reported under the Construction Industry Scheme except for (oddly) supplies of staff or workers. The reverse charge will apply through the B2B supply chain where CIS reporting is required up to the point where the customer has to be treated as the end user. It seems that HMRC think this should all be an incredibly easy shift for everyone to implement despite questions and concerns from trade and professional bodies.
Even though, under the new rules, contractors may often not be charging VAT on their invoices, there will still be a lot of work for them to do. For many the new rules will mean operating two different systems; one where invoices are issued with VAT charged to the end user and the other where the customer is liable for the VAT under the reverse charge. So a key new task for all contractors will be to establish whether, in respect of the work in question, the customer is an end user.
Contractors obliged to confirm end-user status on a job by job basis need to take action now to protect themselves. They need a system to document which jobs are for end users not least as a big unresolved question is what happens if there is a mistake resting on end user status? Whose problem is it? Who would be penalised for getting it wrong? In order to not be charged VAT, what if a customer purposely doesn't say they are an end user? Who is then to blame? Conversely what happens if someone forgets to say they are end user for that particular supply? Who will be held to blame for that? These are all questions that HMRC have yet to address.
Even where the reverse charge applies to a particular project the supplying contractors will still have to split the work done into the 3 VAT rates of 0%, 5% and 20% in order to be able to inform the customer, without issuing an invoice, of the VAT they (the customer) needs to bring to account. This will entail some kind of new system or methodology outside anything that currently exists. Perhaps everyone will have to invent their own Excel spreadsheet and notification templates but doesn't that strike you as odd given the current march towards digitalisation?
Another potential issue arises from customers processing reverse charge purchase invoices. Every organisation will already post VAT-free purchases so absence of VAT on an invoice will not be a sufficient flag to trigger the reverse charge entry. HMRC do not appear to have focused on how they will police the accuracy of customer accounting. So the contractor issues a reverse charge document and the customer fails to notice that it is not just a ‘normal’ VAT free invoice and as a result fails to make the reverse charge entries. If the customer cannot fully reclaim VAT it seems inevitable that penalty risks will arise from this situation so affected customers need to work out their own self protective measures.
Despite all of the uncertainty surrounding the new reverse charge there are still things we can do now to get ready for October -
Key for contractors will be to decide how to charge VAT only to end users.
To be charged VAT in the normal way end users receiving construction work need to confirm their status to the contractor.
Contractors need to devise a method to confirm and document end user status.
Any contracts should provide for the customer paying any penalties arising from providing incorrect end user information.
Contractors need to decide how they will notify the value of work done under the reverse charge at different VAT rates without issuing an invoice.
Customers need to isolate incoming reverse charge invoices and bring VAT to account (subject to any restrictions).
- Prepare a funding plan for potentially delayed VAT refunds – current net VAT payers could be making refund claims which HMRC may query.
- Devise a plan to protect against customer payment delays while they adjust to the new process.
Uncertainties still exist on how the rules will work in practice so all anyone can do for now is plan for the elements that seem certain and keep revisiting the topic as more information become available.
Melanie Lord – Director of AVS VAT. Email [email protected] or call 01438 716176
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