Domestic Reverse Charge for VAT will soon be here. Invoicing and VAT reporting for contractors and subcontractors in the construction industry will change from October 2019.
If your business is not VAT registered the changes will not affect you but for VAT registered businesses, the changes will be significant. Reverse charge VAT has been applied to inter EU purchases/sales for a long time and was introduced for bulk mobile phone sales several years ago. It is now being extended to transactions which fall within CIS (Construction Industry Scheme).
The basic change is that subcontractors will not charge VAT on their invoices to the contractor. However, the subcontractor will need to include a note saying that the Domestic Reverse Charge applies and the VAT amount which would be charged must be shown.
Although CIS only relates to labour, the Domestic Reverse Charge will apply to both labour and materials. If the work falls within CIS, everything charged will be subject to the Domestic Reverse Charge.
Contractors will include both the Input and Output VAT on their VAT Return so the effect on them will be neutral.
It isn’t uncommon for a construction business to be both subcontractor and contractor. This just makes the process a little more complex requiring extra care.
Overall, HMRC will still receive the same amount of VAT (Nil) but subcontractors will suffer a little bit because of a reduction in cashflow. They will not have the benefit of holding VAT paid to them for several months before paying it to HMRC. This may mean looking at pricing to cover the shortfall.
All of the software providers we recommend – Quickbooks, Sage, Xero, KashFlow etc – are making adjustments to their systems to cater for the new rules, which should make the transition fairly easy. We are here and happy to help with any queries or issues you may have.
If you don’t use one of the bookkeeping packages mentioned we can also help ensure your invoicing is correct and showing the right information.
Call us on (01509) 816150 or contact us via our website.
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