Make sure your construction business measures up to HMRC’s new VAT rules

In an attempt to combat tax fraud, HMRC are changing the way that the construction industry handles VAT. Here’s how to tell if you’re affected, and what you need to do.

VAT fraud costs the UK billions. In an attempt to curb the conmen, HMRC has taken several bold steps recently. In April, we saw a crackdown on how online-retailers manage VAT payments, especially overseas sellers.

Now, HMRC is turning its attention to the Construction Industry, where it’s estimated it loses around £100m every year. In October 2019, a Reverse VAT Charge will be introduced for construction services. This means, instead of a supplier being responsible for declaring and paying VAT, the customer will be responsible.

Let’s say you own and run a firm of developers. Up until now, you’ve been able to hire other suppliers — bricklayers, industrial cleaners, decorators, and so on — and leave them in charge of declaring and paying the VAT you’ve paid them for their services.

From October 2019, you’ll need to charge your own business VAT for these services, and pass it on to HMRC directly.

This is an attempt to combat “vanishing tradesmen” — where a supplier charges VAT for their services, but then disappears before they ever pass that over to HMRC.

Will this affect you?

The reverse charge only applies to supplies of specific construction services to other businesses within the construction industry. If you’re simply paying a builder to add a conservatory to your own home, this isn’t your problem.

It’s also important to note that the reverse charges apples only when a business supplies its construction services to another business that will sell on those services. It doesn’t apply when construction services are supplied to a consumer of those services. For example, if you own a shop and commission a builder to extend your shop-floor, you’re not affected. But if you run a firm of shop-fitters that regularly hire tradesmen to complete projects, you could be affected.

Which supplies are affected?

• Construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations;

• Construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence;

• Installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;

• Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;

• Painting or decorating the internal or external surfaces of any building or structure;

• Services related to the above, including site clearance, earthmoving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

Which supplies not affected?

• Drilling for, or extraction of, oil or natural gas;

• Extraction (whether by underground or surface working) of minerals and tunnelling or boring, or construction of underground works, for this purpose;

• Manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site;

• Manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site;

• The professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape;

• The making, installation and repair of artistic works, being sculptures, murals and other works which are wholly artistic in nature;

• Signwriting and erecting, installing and repairing signboards and advertisements;

• The installation of seating, blinds and shutters;

• The installation of security.

What do you need to do?

The first step is to understand how this might affect your business. If you supply services to other businesses within the construction industry, check the list of specified services above. If your service is listed, then you might well be affected, and will no longer be able to charge VAT on those services from October 2019. If you’d like a team of accountants to talk you through the practical issues, don’t hesitate to contact us here.

The Construction Industry Reverse Charge proposal is still only in draft form; you can see the latest version of the proposal here. HMRC have said they’ll release the final version in October 2018. We’ll monitor the story and give you more updates as they happen.

And don’t forget that everyone has to get ready for digital VAT! Here’s our helpful guide.