The construction industry has had a huge impact in the UK. In 2017, it contributed an impressive £113 billion to the economy, with construction output increasing by a further 14% in the 18 months to the end of September 2018.
Even better, demand for domestic construction projects in the UK remains high.
The Government is aiming to build up to 300,000 new homes each year. What’s more, major infrastructure projects like the HS2 railway line, Crossrail and Hinkley Point nuclear power station continue to tick along.
As well as providing homes for our ever-increasing population and improved travel services, the construction industry also creates jobs for more than 2.4 million people. As such a big employer, a new scheme has been created to help regulate the industry. Find out everything you need to know about this as well as the upcoming changes to reverse charge VAT below.
What is the construction industry scheme?
The scheme sets out rules for how payments to subcontractors for construction work must be handled by contractors in the industry, taking into account the subcontractor’s tax status.
Who does the scheme affect?
The scheme covers all construction work carried out in the UK, including tasks such as site preparation, alterations, dismantling, building, repairs, decorating and demolition. It doesn’t usually cover tradespeople who only do specific jobs such as architects, surveyors, carpet fitters, manufacturers of construction materials and those who deliver such materials.
However, an exception exists where a professional goes beyond their discipline to act as the developer or main contractor on top of providing their services.
While it does not apply to construction work taking place outside the UK, a business based outside the UK and carrying out construction work within it, must register under the scheme.
The scheme covers all types of businesses within the construction industry, including companies, partnerships and sole traders. These businesses can be contractors, subcontractors or both.
The terms ‘contractor’ and ‘subcontractor’ have specific meanings under the construction industry scheme, which are much broader than is generally referred to within the industry.
The difference between contractors and subcontractors
A contractor is a business or other concern that pays subcontractors for construction work.
Private householders are not classified as contractors in the eyes of HMRC and therefore the scheme does not apply to you if you’re carrying out work on your own home (if you’re extending your kitchen for example).
A subcontractor is a business that carries out construction work for a contractor. For example, electricians or plumbers who supply their services as part of a bigger construction project.
It is possible for a business to be treated as both a contractor and subcontractor but please bear in mind that different rules apply to both statuses. These rules need to be followed very closely because getting this wrong could land you in trouble further down the line. If you have any questions or concerns about this, please get in touch with our tax, payroll and accounts manager, Peter Bowyer and he will be able to clarify this for you.
How does the scheme work?
Under the construction industry scheme, all contractors and subcontractors are required to register with HMRC. Subcontractors will be subject to a higher-rate deduction if they haven’t registered.
Contractors deduct money from a subcontractor’s payments and pass it to HMRC. These deductions count as advance payments towards income tax and national insurance, similar to PAYE.
A limited company will have deductions taken by the contractor from the income due to the company.
This deduction can then be offset against other company tax liabilities such as PAYE, VAT and corporation tax. Alternatively, it can be refunded to the company after the end of the tax year.
Sole traders and partnerships will also have deductions made from the income they receive.
They are then required to report their gross income on their self-assessment tax return, with contractor deductions also reported on the tax return and subsequently deducted from any income tax liability which is calculated as being due.
Contractors need to verify a subcontractor’s status with HMRC before payment is made to establish whether they are registered and the correct amount of tax to withhold. Tax can be deducted at source at 0%, 20% or 30%.
Contractors must report all of the payments they have made under the scheme to the Revenue, or report they have made no payments in the tax month by the 19th of each month.
Again, it’s important that you get this right because penalties apply if the monthly return deadline is missed.
Domestic reverse charge VAT for construction services
HMRC’s new domestic reverse charge for construction services comes into force on 1 October 2019.
From this point, a VAT-registered business that supplies certain construction services to another VAT-registered business for onward sale, needs to issue a VAT invoice stating the service is subject to the domestic reverse charge.
However, the recipient must account for the VAT due on that supply through its VAT return, instead of paying the VAT amount to the supplier. The recipient may then recover the VAT as input tax, subject to the normal rules.
Unlike other types of reverse charge, the value of such reverse charge services will not count towards the VAT-registration threshold, which is good news for smaller businesses.
Why is this being introduced?
The government is rolling out the reverse charge initiative in a bid to tackle fraud which costs millions of pounds every year. This happens when suppliers or ‘subcontractors’ charge main contractors VAT but disappear before passing sums on to HMRC.
Who does the domestic reverse charge apply to?
The new domestic reverse charge will apply to suppliers of ‘specified services’ which include:
- Painting and decorating
- Civil engineering
- Heating, lighting and air conditioning installation
Some services will not fall within the scope of the domestic reverse charge. Where there is a reverse charge element anywhere in a supply chain however, the whole supply may be subject to the charge.
It’s anticipated that the businesses most directly affected will be those which supply services to main contractors, or that operate through recruitment agencies or umbrella companies.
You can find out more about the reverse charge on our news story, ‘HMRC changes VAT rules for construction businesses.’
How to prepare for the changes to the construction industry scheme
Construction businesses will need to ensure their accounting systems are capable of processing reverse charge supplies.
As the VAT amount must still be shown on invoices subject to the domestic reverse charge, there is a risk that suppliers will still account for the VAT to HMRC in error and likewise, customers will still recover it from the Revenue.
Subcontractors that rely on VAT collected from their customers as working capital until they have to remit it to HMRC, are likely to suffer loss of cashflow.
These businesses will need to consider if payment terms need to be revisited to avoid any problems in the supply chain this could cause.
Before these new rules come into effect, we recommend that construction businesses:
- Review supplies provided to, and received from, other VAT-registered contractors to establish where these will be subject to a reverse charge from October 2019
- Obtain notification from customers, with details of their VAT-registration status, construction industry scheme status, and confirmation that they are the end-user
- Consider any adaptations required to ensure accounting systems can deal with this change
- Reflect on the negative effect on cashflow from October 2019, and ways to mitigate it
PKB can help you navigate the complexities of the construction industry scheme and ensure you remain compliant with HMRC. Please don’t hesitate to contact us if you have any concerns.
You can also head to our blog ‘everything you need to know about personal tax planning’ or download our free tax card from our home page which details all the rates you need to know for the 2018/19 tax year.
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