Sub-contractors at Risk Due to VAT Changes

Evidence gathered by TC Group’s VAT partner Steve McIntyre suggests that many hundreds of sub-contractors are still largely unaware of forthcoming changes in VAT that will affect their business.

The changes are being introduced by HMRC on October 1^st 2019 and will impact on all construction and related companies.

Explains Steve:  ‘Based on the definition of construction services within the CIS rules, a domestic reverse charge will apply to most VAT registered contractors within a supply chain.

‘This new reverse charge will affect not only building contractors but also any VAT registered business acting in the capacity as contractor or sub-contractor for building work, whether or not it’s their normal activity.

‘Many sub-contractors who previously will have charged VAT but not had to pay this across to HMRC for several months will see their cash flow being affected.   They may, with effect from 1^st October, become repayment traders – as they will not charge VAT on their services – submitting a return to HMRC in order to recoup the VAT on materials purchased.’

However, recent experience of meeting many clients and others across the industry has convinced him that it is the sub-contractors who appear to be mostly unaware of what is on the horizon.

Adds Steve:  ‘We are running a number of related seminars across our offices in the South West, South and South East, and attendance has been high.  Feedback has been very positive and attendees confirm that there must be literally thousands of sub-contractors who are simply unaware of what is now only a few months away.’

The new rules are being introduced to crack down on fraud, in much the same way as a similar system was introduced some years ago to crack down on mobile phone fraud, when huge bundles of phones were being sold outside the normal networks to evade VAT.

Steve McIntyre points out that the reverse charge will not apply to zero-rated construction, but for all relevant works at the five and 20 per cent VAT rates.

‘This will affect the way that VAT is invoiced and accounted for on construction services.  Accounting systems therefore need to be updated to deal with the reverse charge, while the possible impact on cash-flow within a contractor’s business needs to be quantified.

‘The reverse charge will also need to be included within contracts and terms of business documents, in which case professionals such as contract lawyers, architects and cost consultants will also need to be aware of the changes.’

TC Group is running a number of related seminars across its regional offices, with forthcoming seminars at Bristol (July 24), Southampton (July 25), Bournemouth (July 26) and Melton Mowbray (Sept 5).

For further information and booking details please contact your local partner or client relationship manager.