New VAT rules are coming into force from 1st October 2019 to create a domestic reverse charge for Construction, known as Construction Services Domestic Reverse Charge.
HMRC are introducing the change to combat missing trader fraud.
VAT registered construction clients will need to account for reverse charge as it was a self supply, the supplier won’t charge them VAT. This then removes the risk of deducting input tax when the output tax has never been paid.
The new system will not apply to Zero Rated Supplies.
Unlike some other “reverse charge” schemes, amounts accounted for under the CSDRC will not count towards the VAT registration limit. This means that if a customer is not already required to be registered for VAT, the CSDRC “deemed self-supplies” will not change this.
Subcontractors will see a loss of cashflow under the scheme and its likely to cause issues for customers as they need their Making Tax Digital systems to be able to cope with the change.
Subcontractors also need to be sure that their services are within CSDRC before agreeing not to charge VAT.
CSDRC will follow the CIS rules to determine what is within the scope of CSDRC.
In the first 6 months HMRC has suggested they will apply a light touch to the new rules.
You should also be aware that HMRC have confirmed that labour agencies and umbrella companies will not be caught by this new scheme even though they may report payments via the CIS scheme. It is an anomaly between what constitutes services under the Construction Act and the VAT act.