Construction industry VAT changes 1 October 2019

Just one month to go until the so-called “Domestic Reverse Charge” will apply to VAT registered traders who are also registered to use the Construction Industry Scheme.

There has been an awful lot of commentary in the press claiming that from 1 October, building contractors will be lumbered with paying their sub-contractors’ VAT.

Perhaps a brief summary of the reason for this change would be useful.

HMRC has noted that a growing number of sub-contractors are registering for VAT, adding 20% VAT to their invoices, collecting this VAT charge from their customers and then disappearing without passing on the VAT collected to HMRC. Needles to say, HMRC are not too pleased with this trend.

And so, from 1 October 2019, VAT registered subcontractors invoicing their work to other CIS registered firms will not charge VAT on the supply. Instead they will advise the main contractors that their supply is subject to the reverse charge process.

Prior to 1 October, contractors would simply pay the VAT inclusive amount to their VAT registered sub-contractors and then claim back the input VAT paid on their VAT return.

After 1 October, contractors will pay the net of VAT amount to their sub-contractors and then make two adjustments to their VAT return: firstly, adding the sub-contractors VAT to their output tax, and at the same time, claiming back the same amount as input VAT.

Accordingly, contractors will pay their sub-contractors VAT, but in the same breath they will claim it back – subject to the usual rules.

The mechanics of accommodating the accounting entries to cope with the new process can be programmed into your bookkeeping software. However, there could be complications if you use one of the VAT special schemes, such as the cash accounting or flat rate scheme.

We recommend that you take professional advice before 1 October, to make the changes required to your invoices and accounts software and to make sure that you do not need to change your present VAT scheme.

Please call if you would like our help to do this.

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