The Reverse Charge Mechanism is Coming
HMRC is planning to introduce new rules to combat construction fraud. The changes are a long way off, but we want to tell you about this now in case you haven’t heard about this yet.
The really fine detail won’t be decided by HMRC until October 2018. The changes will apply from October 2019. Why such a long delay? The reason is that these changes will affect thousands of VAT (small to medium) businesses, and HMRC doesn’t have a good record on getting things right first time.
What will happen?
Even this bit is pretty complex, although it doesn’t affect everyone using building services, for example domestic consumers and only designated businesses.
Those designated businesses falling in this plan will not collect VAT on their sales to their specified customers. Instead
their customer will account for the output VAT under the reverse charge mechanism. Reverse charge is where the specified customer prepares a special invoice for the supply of work.
Let’s choose
a random example and say a VAT registered groundworker supplies 2 days of services valued £1000. The groundworker’s customer is “Acme Groundworks Ltd”. “Acme” is going to invoice Builder for £300,000 to prepare the site and install roads and utilities etc.
The groundworker has to make an Invoice to “Acme” for only £1000 and it will contain the normal information required on a VAT invoice, except the VAT. The invoice must also include a reference to the reverse charge – for example one of the following:
- reverse charge: VAT Act 1994 Section 55A applies
- reverse charge: S55A VATA 94 applies
- reverse charge: Customer to pay the VAT to HMRC
“Acme” makes out a special invoice for say £1,000 plus £200 VAT and refers to reverse charge and groundworker’s VAT number. It shows £1,000 input value and £200.00 VAT on its VAT return. On the same return is shown £200.00 as sales VAT but no entry for the £1,000 as sales value.
Using reverse charge, “Acme” get their £200 VAT allowed but also HMRC know that the £200.00 groundworker services VAT has been covered. The net cash effect on “Acme” is just the £1000 it pays to the groundworker.
Without reverse charge, if the groundworker did not put the £200 on their VAT return, and went missing, HMRC would have been out of pocket by £200.00. By the way, we are not casting aspersions about groundworkers, just giving an example!
Of course, you could say that this can happen in any VAT situation, construction or not, and you’d be right. HMRC are saying that fraud in construction is particularly prevalent. As to how much tax will be recovered , that is being debated.
The types of construction services affected are based on those to which the construction industry scheme applies. If goods are supplied with the affected services, the goods would also be subject to the reverse charge.
(There are several very complex examples of exceptions from the reverse charge mechanism involving intermediaries. Without getting too technical the most common one will be at the end of the chain – Retail customers such as a Builder selling a freehold or leasehold to an owner or occupier)
Going back to our example, our Builder would not apply reverse charge to the “Acme” bill of £300,000 because Builder will sell houses direct to freeholders or long leaseholders. “Acme” will issue their invoice in the usual way.
Simple?
Is it ever simple when it comes to changes in VAT from HMRXC? If you are confused, or just need some help,
contact us and talk to us about VAT and let us help you handle it better.
