A major change to the way VAT applies to the construction industry is just three months away. Will you be affected and how should you prepare for it?
Reverse charge. From 1 October 2019 a reverse charge for VAT will apply to building and construction services. It will affect you if your business makes or receives supplies which are covered by HMRC’s construction industry scheme (CIS) and you are registered for VAT.
How will it work? In simple terms the reverse charge means that when, on or after 1 October 2019, you bill a customer for services to which the CIS applies you must not charge VAT. The other side of the coin is that when you receive supplies of CIS services you must account for VAT (charge yourself VAT) at the appropriate rate (standard 20% or the lower 5% rate) and on the same return reclaim the VAT if entitled to according to the usual rules. Tip. HMRC released a brief guidance note on the reverse charge in November 2018 and on 7 June 2019 it published brand new extended guidance.
Modifying VAT records. You will need to change the settings in your bookkeeping and invoicing software to account for and report the reverse charge correctly on your VAT returns so that:
- where you’re the supplier, no entry in Box 1 (VAT on sales etc.) is made for CIS goods or services, but the value of such sales is included in Box 6
- where you are the customer you must enter in Box 1 the VAT on purchases subject to the reverse charge. Do not enter the value of the purchases in Box 6. Also, include the amount of reverse charge VAT you’re entitled to reclaim in Box 4
- if you use invoicing software make changes to ensure that VAT isn’t added for supplies where the reverse charge applies.
A reverse VAT charge will apply to supplies you make or receive under the construction industry scheme from 1 October 2019. Make sure you amend the settings in your bookkeeping software to account for the change.