You may have read that new procedures are being introduced on 1 October 2019 which will affect any construction business where the contractor and subcontractor are both VAT registered.
Under current rules, a builder charges VAT in the usual way. This is changing for supplies of both labour and materials between these businesses. The subcontractor will invoice the contractor without charging VAT. The contractor will account for the VAT on their return under what is known as the “reverse charge” procedure. The contractor will not be affected as the notional VAT is included both as a receipt and payment in boxes 1 and 4 on the VAT return (box 7 will still include the net value of the payment).
The reverse charge is based on the rate of VAT that applies for the work in question but only supplies subject to either 5% or 20% that are included. Zero rate supplies are excluded.
OTHER ISSUES TO CONSIDER
Both contractor and subcontractor must ensure that they are registered for CIS and have a valid VAT number.
The subcontractor will specify on his sales invoices the amount and rate of VAT that the contractor needs to declare under the “reverse charge” procedure. Although not required, we feel it would be beneficial to include the contractor’s VAT number on the invoice.
The subcontractor should include wording along the lines of “Reverse charge. Customer to account for the VAT to HMRC”.
HMRC suggests that if there are any doubts about the credentials of a contractor customer, a deposit equal to the amount of VAT not being charged should be collected from the contractor e.g. if they have asked for but not received a VAT number.
We hope this is reasonably clear but if you have any queries please don’t hesitate to contact us.