HMRC have released the long-awaited guidance on how the new VAT accounting process is to work between Sub Contractors & Main Contractors.
In effect this transfers the obligation to account for Output VAT from the sub-contractor over to the main Contractor – in the same manner in which CIS transfers the obligation of tax from subbie to ‘employer’. It is a measure against missing trader fraud that is intended to remove the opportunity for labour intensive trades to charge VAT yet not pay it over.
Key points are:
- Commencement on 1 October 2019
Where a contract spans this date it is the normal tax point of the invoice that will dictate when to start using the Reverse Charge
[Back to school point : The Tax point is the earliest of receiving an invoice or making a payment]
- It is ALL of a subbies contact that will be recorded – irrespective as to the split between labour & materials, or even if his works contain elements that on their own would be outside the Reverse Charge.
It is therefore a relatively simple ‘all of nothing’ decision
- It is only persons with Main Contractor status that need to use the Reverse Charge, that is to say those entities making onward supplies of Construction Services
Developers, ‘Deemed’ Contractors, Local Authorities and other ‘End-Users’ are excluded
- What checks a subbie must undertake
Is the Main Contractor CIS Registered & VAT Registered ?
The wording that is required on the invoice
What is not discussed at all is the evidence a Main Contractor must hold for lower rated schemes or how a partially lower rated project is to be treated (say a mixed residential / commercial project). We know that zero rated projects do NOT need to be recorded through the scheme, but there must still be supporting evidence to justify accounting for 5% schemes.
- What relief is being used ?
Empty, Change in Number, Change in Use etc
- What are the tests required for this Relief ?
Period of vacancy, definition of ‘qualifying conversions’
- What evidence is there in support ?
Council Tax, Electoral Roll, Planning Consents, Drawings, Pre-App and D&A’s.
- Where does the Lower Rate apply ?
‘Qualifying services’, eligible building materials, ‘works closely connected to’
- Where must VAT be accounted for at the Standard Rate ?
Non-residential costs – retail, commercial, proportion of circulation areas
Works outside buildings fabric, specified domestic FF&E
To that end we will be adapting the Formal Audits we provide Main Contractors (that support you charging the lower rate to your client), to facilitate the internal accounting of Sub-Contractors supplies.
This will require a degree of input from you but trials so far demonstrate acceptance by both Customs and sub-contractors.
To discuss this or indeed any other aspect in greater detail please do not hesitate to contact a member of the Private Client Construction Team