- 14 Aug 2018
- Comments Off on The construction industry faces new VAT regulations
Starting on 1 October 2019, a new legislation by HMRC is coming into force that will influence the construction industry. Its purpose is to change the way VAT liability is handled for construction businesses, introducing a reverse charge that is supposed to make the process far clearer.
How it works
As of now, the VAT chain of supply is quite straightforward. Every business within that chain is obligated to add VAT to the value of their goods or services, while the purchaser reclaims it, as long as they are VAT-registered. This chain ends with the final consumer, not entitled to reclaiming VAT, purchases the product. The system in place works properly as long as everything is properly reported to the HMRC for whatever reason, be it bankruptcy or any other problem with the tax system. This is why the government is proposing the reverse charge mentioned previously.
The main principle behind the idea of reverse charge is that it’s not the supplier, or seller, that charges VAT to the customer. Rather, it’s the customer that charges VAT for themselves. Because the VAT has been paid by the purchases, the customer may then reclaim the VAT as normal. This is common practice within the EU, usually applying to cases where the goods are purchased by a business form another country.
How it impacts the construction industry
The legislation has now exited the draft page and will be implemented on 1 October 2019. That is enough time for you to properly familiarise yourself with it and prepare for its introduction if you’re working in the building or construction industry. You will not be affected, as a customer, if you aren’t from the construction industry – your VAT when paying a building contractor to perform construction work on your business premises will be calculated as usual. The rules are also not applicable to supplies to non-business customers.
Reverse change pertains to the majority of goods supplied as part of construction services as well. All of the services and goods in the Construction Industry are also covered by the VAT reverse charge, so it shouldn’t be hard to figure out what to look out for.