Builders – VAT: reverse charge for building and construction services

Changes to the way that builders charge VAT for their services are being introduced from 1 October 2019. The guidance issued by HMRC does not give detailed examples and we expect further details and examples to be released in Spring 2019.

The change in rules from 1 October 2019 will affect VAT registered builders providing certain construction or building services to another VAT registered business for onward sale/supply. There are some exceptions where the new rules won’t apply, typically it will apply to work that falls within the construction industry scheme.

The Reverse Charge Mechanism 

Under the current rules where both businesses are VAT registered and where the building work is normally standard rated for VAT, a subcontractor charges VAT on the supply of building work to contractors, the contractor would pay the VAT to the subcontractor and the subcontractor would pay this VAT to HMRC.

Under the new rules that apply from 1 October 2019, this will now be treated under the Reverse Charge rules. The invoice to the contractor will need to state that the service is subject to the domestic reverse charge. 

The contractor will need to treat any VAT under the reverse charge rules as both input and output VAT. The result for the contractor is a nil net tax position, as they are including the VAT as both input and output VAT.

For the subcontractor, this may lead to VAT returns being submitted where repayments of VAT are due to them from HMRC, as no VAT will be charged under the reverse charge rules. This could potentially lead to delays for some businesses in receiving VAT refunds from HMRC.

The contractor needs to know whether they are dealing with the final customer, as the reverse charge only applies between businesses. VAT should be charged to the end customer.