Posted on 16th August 2019
When the new VAT guidelines for the Domestic Reverse Charge (DRC) go live on 1 October, all businesses in a Construction Industry Scheme (CIS) supply chain must be ready to comply.
From 1 October 2019, new VAT rules will come into play that will halt the current practice of sub-contractors collecting VAT from other contractors when an invoice is raised. As an anti-fraud measure against sub-contractors who charge VAT and then disappear, rather than the supplier charging and accounting for the VAT, the recipient of those services will now account for the VAT.
The new VAT reverse charge will apply to certain specified building and construction services between two VAT-registered businesses, where the recipient makes an onward supply of those specified services.
For many VAT-registered construction workers, large VAT refunds have historically been relied upon to aid cashflow. But any sub-contractor working exclusively for main contractors will now not charge VAT for services provided.
Sub-contractors can still claim VAT on expenses such as the cost of materials. But if you have received substantial VAT refunds in the past, you should plan ahead to mitigate the effect of this change on your cashflow. Switching to a monthly VAT return could help to address cashflow concerns.
Main contractors will be affected in the opposite way and therefore should see improved cashflow. However, it is imperative that main contractors also understand the new DRC guidelines, as the responsibility and accuracy of VAT returns will be their concern.
There will be no transition period for the DRC changes, so all construction companies must be ready to adapt to the new invoice rules and know how their VAT calculations will change from 1 October.
HMRC is expected to strictly enforce these rules, so don’t hesitate to seek assistance from JNR Accounting to ensure that your business is compliant with the DRC at all times.