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New HMRC VAT Rules: Building Contractors to become responsible for sub-contractors VAT

by Berthold Bauer on June 21, 2018

A new VAT Accounting procedure is to be implemented in October 2019 whereby the Main Contractor will become responsible for a sub-contractors VAT. In the same way in which the Construction Industry Scheme has addressed the missing tax aspect of labourers and small traders in the construction industry (by placing the burden of tax collection on Main Contractors & Developers); the purpose of the Reverse Charge for Construction Services is to reduce the occurrences of ‘disappearing trader fraud’.
This is where labour-only Construction providers incur little in VAT on overheads yet charge VAT in full to Customers – giving the opportunity for them to abscond from the VAT system…along with the VAT they have charged & collected.

To address this, HMRC are looking to introduce a self-billing structure whereby it is the Customer (read: Main Contractor) who accounts for the VAT that should have been charged by his VAT Registered sub-contractors.

It is only draft legislation that has been published, along with basic consultation information for final comment by the end of July next year; but the final system is likely to operate as follows:
• A VAT-registered Sub-Contractor to issue an invoice to the Main Contractor without VAT
• The Main Contractor will then ‘self-bill’ himself this VAT, paying it over to HMRC on his VAT Return
• At the same time, if this VAT would normally have been eligible for input tax claim; it will be reclaimed from HMRC on the same VAT return
• In most instances therefore the net effect will be zero

It will however create additional administrative burden yet mean the opportunity for missing trader fraud is vastly reduced. It is expected that this process will only be required for those making onward supplies of Contraction Services; with the general public, landlords and non-construction businesses being unaffected (again similar to how CIS operates). Architects and Design Professionals will also be excluded from the process.

There are many important details left unsaid – how a Contractor will identify sub’s and suppliers to whom this process will apply, what defines an (excepted) end-user and how the Developers Blocking Order will be addressed. We will publish further guidance as it is announced but in the meantime please contact the Private Client Team for any question you may have – on this or indeed any VAT related matter.

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Berthold BauerNew HMRC VAT Rules: Building Contractors to become responsible for sub-contractors VAT

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