VAT reverse charging – what you need to know

VAT reverse charging – what you need to know

From 01 October 2019, the VAT reverse charge for building and construction supplies will come into effect.

But how will the new anti-tax avoidance scheme affect your business? And how should you prepare?

Let’s start with the basics: what exactly is the ‘VAT reverse charge’?

The new scheme – designed to target contractors and the construction industry – will permanently change the way VAT is collected on building supplies and materials.

Ultimately, the scheme is being introduced to crack down on a type of tax fraud known as ‘missing trader fraud’. A simplified version of ‘carousel fraud’, this type of fraud takes place between multiple traders, exploiting the UK’s complicated VAT payment and collection system.

The most basic version of this fraud involves a trader – involved somewhere along the supply chain – selling building supplies or materials, before ‘disappearing’ – taking the VAT portion of the sale with them.

But under the new regulations set out by the VAT reverse charge scheme, the responsibility for the reporting of a VAT transaction moves from the seller to the buyer.

As per HM Revenue & Customs (HMRC) guidance, this means the customer will be liable to account to HMRC for the VAT in respect of purchases rather than the supplier (this is the ‘reverse charge’).

The reverse charge will apply through the supply chain where payments are required to be reported through the Construction Industry Scheme (CIS) up to the point where the customer receiving the supply is no longer a business that makes supplies of specified services – these businesses are referred to as ‘end users’.

The most recent figures suggest that around 100,000 to 150,000 contractors and businesses need to take note and be ready to implement the scheme from day one.

So, what does this all mean?

For small and medium-sized businesses, the new scheme could have a significant impact on cashflow, as they can no longer use the VAT portion of the sale as ‘working capital’ to cover expenses before reporting it to HMRC.

Cashflow, as we already know, is vitally important to success, and even the most minor interruption can hurt a business immeasurably.

Secondly, the scheme will significantly change the way the industry accounts for VAT, from the very bottom to the very top of the supply chain. This includes calculating the reverse charge, keeping records of all reverse charge supplies, checking purchases are correctly treated and reporting reverse charge supplies on VAT returns.

As a result of the additional administrative burden, we expect a number of businesses to fall foul of the rules and risk pricey penalties for non-compliance.

While October may still seem like a while away, we recommend that businesses prepare for the changes now and be fully compliant with the scheme from day one. For help and advice, please get in touch with our expert accounting team today. More information about the VAT reverse charge scheme can be found here.