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About face by HMRC

Last month we reported the changes that CIS, VAT registered contractors and sub-contractors were about to face with the introduction of the “reverse charge” process from 1 October 2019.

Shortly after our newsletter was published, HMRC conceded that it was aware that the industry was struggling to adapt to the new rules and, as Brexit is also looming large this month, HMRC has agreed to defer the change until 1 October 2020.

This is a triumph for the construction industry lobby groups who have pushed hard to have this VAT change delayed.

Just in case you missed our alert on this topic last month the nuts and bolts of the reverse charge process for VAT registered businesses who are subject to HMRC’s Construction Industry Scheme, are:

From the 1 October 2020, you may need to change the way you account for VAT on supplies between sub-contractors and their contractor customers.

At present, sub-contractors registered for VAT are required to charge VAT on their supplies of building services to contractors. From 1 October 2020, this approach is changing.

From this date, sub-contractors will not add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers.

This does not mean that contractors, in most cases, are paying their sub-contractors’ VAT as an additional cost.

When contractors pay their sub-contractors’ VAT to HMRC, they can claim back an equivalent amount as VAT input tax; subject to the usual VAT rules. Accordingly, the two amounts off-set each other.

The change is described as the Domestic Reverse Charge for the construction industry. It has been introduced as an increasing number of sub-contractors have been registering for VAT, collecting the VAT from their customers, and then disappearing without paying the VAT collected to HMRC.

Affected contractors now have a year to make the appropriate changes.

If by chance you have already made changes to your account’s software and invoicing processes, you will need to reverse the process and moth-ball the changes for twelve months.

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