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Use subcontractors? Their VAT is about to become your problem

Major changes to the way HMRC collects VAT in the construction industry will add considerably to the reporting burden, and they are now just one year away.

The measures will take effect 1 October 2019 are intended to tackle a type of fraud involving many labour-only businesses.

HMRC estimates that an average of £100m a year will be raised by the new measures, which will affect around 300,000 firms.

Although detailed guidance is due this month, the direction of travel is already clear and the promise of a light touch for genuine mistakes will only apply for a short period of time.

Currently, a supplier is required to pay the VAT collected on the value of their supplies at 20 per cent above a certain limit.

The fraud occurs where the supplier charges VAT on services provided, is then paid the VAT and then goes ‘missing’ as a trading entity before having to pay it to HMRC.

What is changing?

HMRC’s solution is to make the customer responsible for accounting for the VAT, instead of the supplier.

This twist is known as the ‘domestic reverse charge’.

The change is relevant to businesses that are supplying construction services to another business in the following areas: 

  • The construction, alteration, demolition or dismantling of a building;
  • Installation in any building of heating, lighting or air conditioning;
  • Painting and decorating of any building;
  • Internal cleaning of a building while being constructed or extended.

This change also applies to goods supplied alongside construction services.

It is not applicable to end users of construction services, such as individuals, those constructing buildings for their own use or future sale. Examples include: 

  • Interior/exterior decoration of the landscape;
  • Professional work of consultants;
  • Installing security / public address systems;
  • Installing of seating, blinds and shutters;

The impact of what is proposed will be considerable.

HMRC normally downplays the effect of changes it makes but not this time.

The changes are described as “significant” and the cost in terms of administration, time and reporting is likely to be high.

There are many questions that perhaps only time will answer, but what is already clear is the risk of duplication at every turn as firms contracting secondary suppliers find themselves with added responsibility. 

But there is time to prepare.

Businesses that supply other contractors with services and goods likely to be caught by this change should look into how they will be affected now.

Raphael Suissa is a VAT specialist at accountancy and business advisory firm BKL

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