Construction industry VAT rules change

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Do you operate in the building or construction industry? The new rules of VAT in the construction industry will likely affect you.

Domestic Reverse Charge – Building & Construction

It isn’t just MTD that SMEs need to be prepared for this year…oh no. HMRC wanted to load more on to your plates!

From 1st October 2019 the new “Domestic Reverse Charge” or DRC rules come in to play, affecting all VAT registered businesses supplying or buying any building work.

This includes:

  • Construction
  • Alteration
  • Repairs
  • Extensions
  • Demolitions
  • Installation of light, heat, water or power systems
  • Drainage
  • Scaffolding
  • Civil engineering
  • Site clearance
  • Excavation
  • Foundation works
  • Even painting and decorating!

This will not affect works qualifying as zero-rated projects.

From October 19, the supplier (main or sub-contractor) will need to check & validate the customers VAT registration status.

  • If the customer IS VAT registered, then you have to apply the reverse charge rules
  • If the customer IS NOT VAT registered, the you invoice with VAT at the normal rate in the normal way

VAT in the construction industry: Reverse charge rules

As mentioned, if the customer is VAT registered, the new DRC rules apply.

This means that the supplier will invoice on a reverse charge basis (essentially net amount without VAT added), and the customer will charge themselves VAT at the same time as claiming it back (complicated, we know!).

Flat rate scheme businesses – what this means

If this new legislation affects you, and you operate using the flat rate scheme, the message is, consider leaving this scheme before October 19, as there could likely be a negative impact for you.

Other things to consider

The software/invoicing system you use will need to be able to handle different VAT rates. You may need to change VAT rates between invoices regularly.

You will need to have some type of written communication to be kept as evidence, showing the VAT registration status of the customer and their VAT number (if they have one).

Attention to detail will be very important!

Lots to take in here. Planning is going to be key. There are only 6 months until this begins. Do not presume it doesn’t affect you, just because you may not have heard about it yet.

This is and will be just as big as MTD for businesses affected. Cash flow could be negatively affected, as VAT refunds could be dramatically reduced!

A strong bookkeeping system will need to be in place, along with an understanding of VAT and the reverse charge system.

If you want to discuss how we can help you and your business prepare for October, and then remain compliant, get in touch with us today.

Contact us if you have any questions at all – Just call us or book an appointment.

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