Earlier this month the government held off on their proposals to implement new VAT rules for the building and construction sector. However, this was merely a postponement of the new ruling rather than a U-turn. This means that from 1 October 2020, construction companies will be subject to new rules on how they handle and manage VAT.
What is the VAT domestic reverse charge?
The new regulations, known officially as the ‘VAT domestic reverse charge for building and construction’, will affect a variety of construction services including the purchase of materials used as a direct part of the fulfilment of those services.
In simple terms, the VAT domestic reverse charge can be seen as an extension of the Construction Industry Scheme (CIS), affecting transactions undertaken between VAT-registered contractors and sub-contractors who are CIS registered.
What changes will come into force with the new rules?
The new regulations will shift the onus of accounting for VAT away from suppliers and onto customers. This means responsibility for accounting for VAT will be with the contractors who will account for this as though they supplied the service themselves. Simply put, sub-contractors will no longer need to account for VAT directly as this will be done by the contractor.
This is expected to negatively impact the cash flow of some sub-contractors who will no longer be in receipt of VAT payments from customers. It is therefore vital that those who are concerned about this, utilise the additional time granted before these regulations come into force to scrutinise their financial position and put plans in order to lessen the fallout. This could involve reassessing how incomings and outgoings are managed, or exploring whether an injection of capital is going to be required to ease the transition.