CIS- changes to VAT treatment; reverse VAT charge being introduced In October 2019

‚ÄčIf you're in the construction industry & either fall under the Construction Industry Scheme yourself, or employ contractors, then this change will most probably effect you:

HMRC have decided that the treatment of VAT, under CIS will change on the 1st of October this year.Therefore, you must make sure that you understand the changes & how they will effect your business. 

Under the new changes, customers receiving the service will have to pay the VAT due to HMRC, instead of paying the supplier. This means, that the VAT will be treated in the same way as deductions under CIS are now. VAT can then be recovered, using the normal method.

One key difference between CIS and the new reverse VAT, is to do with, when materials are included within a service. The reverse charge applies to the whole service (so include the VAT on materials). Whereas, of course CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content.

It is important to note, that the new reverse charge,does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK.

If you are an 'end user'...

The reverse charge does not apply to consumers or final customers, of building and construction services. This means that any consumers, or final customers who are registered for VAT and CIS will need to ensure their suppliers do not apply the reverse VAT charge. 

Consequently, it is crucial to find out if the business you supply to is the 'end user'.  If you're not sure of the answer, then you should ask your client & keep a record of their answer (so it might be a good idea to ask in any email, so you have a digital record of their answer).

So why is this change happening?

This is happening to try & combat VAT fraud, which is a real problem in the construction industry. It is apparently common that some businesses don't pay their VAT bill. Then, after a while the business is closed down

So what should construction businesses do, in order to prepare?

  • Make sure you understand the changes & how it will effect you.
  • Review supplies made to, as well as received from other VAT registered contractors. This will be  to establish, whether these will be subject to a reverse charge from October 2019
  • You must obtain notification from customers, that they are an end user and confirmation of their VAT registration and CIS status
  • Make sure that your current accounting systems can cope with this change.
  • Consider the impact on cash-flow & think how you can try to mitigate this.