Construction VAT Changes

Changes are coming to VAT for the construction industry. These changes are taking place from the 1st October 2019 and will change the way you need to raise invoices if you sell construction services to other business in the construction industry. You may also notice that invoices you receive from customers in construction will be different.

I have already written to all of my directly affected clients with advice, but I thought I would also share it with you in this article to make sure you are prepared.

Who is affected?

If you are VAT registered and work in the construction industry, then it would be a good idea to familiarise yourself with these changes. You may need to issue invoices differently and change how you account for VAT.

It will not affect your business if you supply construction materials or if you supply non construction services to the construction industry. E.g. if you supply accounting services to a construction company there will be no changes.

What is changing?

At the moment, if you are VAT registered, you put VAT on sales to customers and receive invoices with VAT on where you can reclaim the VAT.

This is changing for supplies between VAT-registered builders. The builder will invoice their builder customer without charging VAT and it is the customer that will put it on their VAT return.

So if you are a subcontractor you will send the main contractor an invoice without VAT on it. You will also be paid the net amount of the invoice (less any CIS).

If you are a main contractor in the building industry you will receive invoices with no VAT from your construction industry suppliers and you will be responsible for putting the VAT on your return. Don’t worry, this will not mean you have to pay the VAT over to HMRC because you will also put in another entry in purchases VAT to cancel this out (this is called the reverse charge principle in tax speak). The overall effect will be tax neural for you.

Why is HMRC doing this?

At first this may seem a bit odd as it looks like VAT is being taken out of the construction industry and essentially this is what is happening. HMRC have identified that certain builders are more likely to suffer VAT fraud. Some unscrupulous traders have been raising VAT invoices but then never declaring the additional 20% to HMRC. By taking the VAT out of the equation it will stop this happening.

What do you need to do?

If you are in the construction industry you need to ensure you are registered for VAT (if you are over the threshold) as well as CIS as appropriate.

If these rues affect you then on your sales invoices you must put the rate of VAT that your customer needs to put on their return and you need to include the wording “Reverse charge: customer to pay the VAT to HMRC.”

The main contractor will need to tell the subcontractor that they are an intermediary supplier and that their subbies should not charge VAT on their invoices as these new rules apply. They should also then pay the subbies invoices net of VAT.

Penalties from HMRC for errors

HMRC has confirmed that penalties will not be charged for mistakes with the new procedures up until 31 March 2020 unless you are deliberately seeking to commit fraud or similar.

If any of these rules affect you or if you have any questions then please get in touch and I will be happy to help.


Matthew Russell