Domestic Reverse Charge Construction And Property Accounting: Are you ready?

Why was the domestic reverse charge introduced?

The domestic reverse charge, which will come into effect from the 1st October 2019, will be the government’s attempt to help prevent and eventually stop organised criminal attacks on the VAT system within the construction industry. In the Spring Budget of 2017 when the government had shown its initial intentions to tackle this problem their objective had become to ensure adequate anti-fraud measures were taken to remove any opportunity that is given to fraudsters to charge VAT, and then disappear before paying it over to the Exchequer.

How does the domestic reverse charge work?

Under the current VAT Act 1994, the law states the supplier will be liable for any VAT on the supplies of goods or services. Under S4, VAT Act 1994; the supply of goods or services that allow for the advancement of a business, the individual that is concerned at the time will then be charged appropriately. The rate of VAT charged will vary from 0 – 20% depending on the type of building the construction service is being carried out on. 

The proposed revision that will come into play at the start of October this year, will not have changed the liability of the supply of the specified services. What will be changed and will be of concern is the way the VAT will be accounted for by your construction accountant or property bookkeeper. Under the new revisions, it is the duty of the recipient receiving the supplies to account for the VAT on their behalf and not the supplier.

So, depending on what function or role you have within the construction industry (contractor or sub-contractor) here are some of the procedures you can follow to ensure you are up to date with the new property and construction company accounting rules.

Are you a contractor?

If you are a contractor, then you will check your contracts along with sub – contractors making them aware in advance how the reverse charge will apply to the services provided, notifying your suppliers if they are impacted.

Are you a sub – contractor?

If you are a sub-contractor, then you will need to ensure you check all the terms and conditions of your contract to find out how you’re invoicing, and what will change for the services you are providing them. Alongside that, sub- contractors will have to do the following verification checks for their customer:

  • Check if your customer is VAT and CIS registered or an end-user 
  • Verify the VAT status of customers
  • Verify the CIS registration of customers

Some further checks you can carry out, to ensure you’re up to date if you are involved either as the developer or the sub- contract:

  • Check if either your sales or purchases will be affected.
  • Update any accounting systems or software’s to factor in the reverse charge.
  • Any impact on your cash – flow due to changes 
  • Whether internal or external make sure your accountants or bookkeepers are familiar with the new change and how it will operate. 

Alongside these checks you can find a short list below detailing some of the services that will be affected at the start of October this year. 

Type of services liable for reverse charge: 

  • constructing, altering, repairing, extending, demolishing, or dismantling buildings or structures (whether permanent or not), including offshore installation services
  • constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks, and harbours.
  • pipelines, reservoirs, water mains, wells, sewers, industrial plants, and installations for purposes of land drainage, coast protection or defence.
  • installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure.
  • internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension, or restoration
  • painting or decorating the inside or the external surfaces of any building or structure
  • services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works

Type of services excluded from reverse charge:

  • drilling for, or extracting, oil or natural gas
  • extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
  • manufacturing building or engineering components or equipment, materials, plant, or machinery, or delivering any of these to site
  • manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
  • the professional work of architects or surveyors, or building, engineering, interior or exterior decoration and landscape consultants
  • Creating, installing, and repairing artworks such as sculptures, murals and other items that are purely artistic
  • signwriting and erecting, installing, and repairing signboards and advertisements
  • installing seating, blinds, and shutters
  • installing security systems, including burglar alarms, closed-circuit television, and public address systems

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