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New Rule to Prevent Construction Industry VAT Fraud

New Rule to Prevent Construction Industry VAT Fraud

John Woodhall examines the impact of a new VAT rule to combat fraud.

The construction industry deals well with change, but the effects of the domestic reverse charge on contractors and subcontractors registered for VAT and operating under the Construction Industry Scheme look likely to be far-reaching.

Amid concerns that SMEs were unprepared, we welcome the decision by HM Revenue & Customs (HMRC) to delay its introduction until October 2020.Under the new rule, suppliers will be required to report the tax but not collect it. Instead, customers will account directly to HMRC and take responsibility for paying the VAT due.

Yet, the domestic reverse charge is not simple – it applies to standard and reduced rate VAT supplies but not zero-rated supplies and there are plenty of exceptions. Importantly, where jobs includes services that fall outside its remit and supplies to which it applies, the whole supply must be considered subject to the domestic reverse charge.

HMRC’s aim is to close a VAT loophole, but is the measure akin to taking a sledgehammer to crack a nut? Whilst the new rule may mean a welcome cash boost for major contractors, who won’t face long delays between the payment of VAT and its recovery, it could be to the detriment of SMEs. Subcontractors in particular, who are accustomed to using the period between receiving payment from the customer to paying VAT to HMRC to boost their cash flow, will need to run a tighter ship.

Accurate paperwork is a must. Subcontractor invoices will have to indicate what domestic reverse charge VAT would have been due and their records should reflect why they have accounted for it in this way. Main contractors too will have to be more rigorous with their processes, confirming whether a VAT invoice includes the domestic reverse charge supplies and charging the correct amount of VAT.

There is no doubt that construction businesses will need to change their accounting practices to deal with the domestic reverse charge, so let’s make the most of the extra time to achieve compliance.

Download the Vision Newsletter – January 2020