Construction contractors and suppliers should now be ramping up their preparations for major VAT changes, which are set to significantly affect cash flows.
Lee Webster, managing director at LBW Chartered Accountants, is warning that the sweeping VAT changes from 1 October 2019 will require tens of thousands of construction sector businesses to change their VAT accounting practices.
The measure is being introduced in the wake of substantial HMRC losses as a result of high-profile construction business collapses in recent years.
The domestic reverse charge (RC) for the construction sector brings in a new way of invoicing of supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain.
Lee said: “The measure is designed to combat missing trader VAT fraud in construction sector labour supply chains.
“It’s important that construction businesses should be setting aside time to understand how the new rules will impact them. They’ll need to introduce a different VAT invoicing regime from 1 October.”
Under the reverse charge (RC), a main contractor will account for the VAT on the services of its sub-contractors. Its suppliers will not invoice for VAT.
The main contractor accounts for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position.
The new process will operate in a similar way to cross border VAT accounting.
Lee added: “It means that sub-contractors will no longer stop trading owing VAT to HMRC that has already been reclaimed by their customer. The sub-contractor won’t have invoiced for VAT at the outset.
“And while the RC will apply to traders that supply other businesses in the construction sector, it will not affect end users, such as private consumers, landlords or retailers.”
He added: “Essentially, many businesses will invoice nil VAT. They also need to be plan for a reduced cash flow.
“From October, £100,000 invoiced means £100,000 is paid by the customer into your bank. Until then, £100,000 invoiced, with VAT added, brings £120,000 into the bank.”
Lee’s advice is:
Lee added: “LBW Chartered Accountants has produced a flow chart to help businesses that come to us for advice. If in doubt, speak to one of our experts, and we’ll supply a flow chart to support your efforts.”Last modified on