VAT in construction changing 01 Oct 2019?
Discussion
You chaps heard of this? Apparently come Oct 19 if a Main Contractor sends out a VAT invoice the client is obliged to pay the nett amount to the Contractor and the VAT straight to HMRC? Sounds like a disaster in the making to me eg what happens at Sub-Contract or supplier level if the MC hasn't been paid VAT etc.
Only heard it last night for the first time at a legal ish set of presentations.
TX.
Only heard it last night for the first time at a legal ish set of presentations.
TX.
Looks an absolute clusterf
k. No doubt dreamt up by a team fresh from university on the graduate scheme.
We all love a good laugh, the federation of builders has written a letter to Jesse Norman mp, the financial secretary to the treasury asking for its implementation to be put back six months. He will sort it , knows a lot about construction and sme's our jess, Eton then Cambridge to do (you've guessed it) , a second class degree in classics and philosophy.
k. No doubt dreamt up by a team fresh from university on the graduate scheme. We all love a good laugh, the federation of builders has written a letter to Jesse Norman mp, the financial secretary to the treasury asking for its implementation to be put back six months. He will sort it , knows a lot about construction and sme's our jess, Eton then Cambridge to do (you've guessed it) , a second class degree in classics and philosophy.
Edited by markcoznottz on Thursday 25th July 17:21
someone mentioned this at work, had a quick google and it sounds like the biggest admin/ vat return headache. It seems like now every point from client thur main contractor to subcontractor to supplier are gonna be playing a massive game of ‘I owe you’.
My take on it is it makes zero difference to hmrc’s eventual take (as everyone will balance off/ sort it out on the vat return as previous) but it basically speeds up the hmrc cash flow and they get their cut quicker. instead of waiting on it trickling thru the supply chain.
going to cause more work for everyone’s vat returns, so not simplifying it for anyone. It’s a move i really really don’t understand.
My take on it is it makes zero difference to hmrc’s eventual take (as everyone will balance off/ sort it out on the vat return as previous) but it basically speeds up the hmrc cash flow and they get their cut quicker. instead of waiting on it trickling thru the supply chain.
going to cause more work for everyone’s vat returns, so not simplifying it for anyone. It’s a move i really really don’t understand.
This has been introduced to stop the fraud that’s been taking place, contractor charges vat, recovers money from the “customer”, and never pays the vat to HMRC.
Under the new rules, the contractor doesn’t invoice the vat, so doesn’t collect vat it could run off with. The “customer” has an equal and opposite output vat to the input vat it would have had, so doesn’t need to recover input vat. It’s a net nothing, but reduces the risk of fraud, and might impact cash flows for the contractor and customer.
Under the new rules, the contractor doesn’t invoice the vat, so doesn’t collect vat it could run off with. The “customer” has an equal and opposite output vat to the input vat it would have had, so doesn’t need to recover input vat. It’s a net nothing, but reduces the risk of fraud, and might impact cash flows for the contractor and customer.
Alpinestars said:
This has been introduced to stop the fraud that’s been taking place, contractor charges vat, recovers money from the “customer”, and never pays the vat to HMRC.
Under the new rules, the contractor doesn’t invoice the vat, so doesn’t collect vat it could run off with. The “customer” has an equal and opposite output vat to the input vat it would have had, so doesn’t need to recover input vat. It’s a net nothing, but reduces the risk of fraud, and might impact cash flows for the contractor and customer.
How would HMRC even know that the customer has VAT to pay? If I was having an extension built, as you say, I get an invoice for £10k with no VAT. How do I know to even pay VAT? What is stopping me from simply not paying it even if I was aware?Under the new rules, the contractor doesn’t invoice the vat, so doesn’t collect vat it could run off with. The “customer” has an equal and opposite output vat to the input vat it would have had, so doesn’t need to recover input vat. It’s a net nothing, but reduces the risk of fraud, and might impact cash flows for the contractor and customer.
As my OP what happens down at sub-contract level? The contractor isn't getting paid VAT but presumably will still get VAT bills from his supply chain?
TX.
Terminator X said:
As my OP what happens down at sub-contract level? The contractor isn't getting paid VAT but presumably will still get VAT bills from his supply chain?
TX.
my take on that (albeit from an hours reading on google) would be that the chain plays a huge game of ‘i owe you’ down the supply chain. TX.
so imagine this scenario on valuation/application/ payment:
client certifies: £1mil payment to contractor plus £200k vat
client pays this vat direct to hmrc and contractor doesn’t receive the vat amount
contractor does vat return as normal and states i’ve ‘received’ £200k but this has already been paid to hmrc under ref: xxxxxxx
subcontractors then all get paid but without vat (same as client to main contractor)
decorator
brickie
civils
electrical
all then submit vat returns as normal but state that vat of ‘£yyyy’ has already been collected under ref: xxxxxxx
but the problem is subcontractors will probably still have to pay vat out to suppliers, because materials probably can’t be fully apportioned to one specific project.
which will cause no end of headaches for cash flow, as you may have to pay vat for some products/ services, but don’t get paid vat on your contract.
as I said above i don’t see how much hmrc will gain from this, other getting first dibs on the vat take and speeding up cash flow for them.
Terminator X said:
How would HMRC even know that the customer has VAT to pay? If I was having an extension built, as you say, I get an invoice for £10k with no VAT. How do I know to even pay VAT? What is stopping me from simply not paying it even if I was aware?
As my OP what happens down at sub-contract level? The contractor isn't getting paid VAT but presumably will still get VAT bills from his supply chain?
TX.
You’re not the end user for these purposes. This is aimed at vatable businesses in the chain of construction, who are working for the company that ultimately supplies the building to you or I. As my OP what happens down at sub-contract level? The contractor isn't getting paid VAT but presumably will still get VAT bills from his supply chain?
TX.
The Moose said:
Isn't the whole idea of this to shift the burden of paying the VAT to HMRC onto the "end" customer? Easier to pursue the end customer?
The reason for the change is to protect against fraud. By pushing the “burden” to the end customer (last person in the chain who’s VATable) there’s only one person who can now abscond with a load of output VAT. It reduces admin for HMRC, and probably improves cash flow. Alpinestars said:
The Moose said:
Isn't the whole idea of this to shift the burden of paying the VAT to HMRC onto the "end" customer? Easier to pursue the end customer?
The reason for the change is to protect against fraud. By pushing the “burden” to the end customer (last person in the chain who’s VATable) there’s only one person who can now abscond with a load of output VAT. It reduces admin for HMRC, and probably improves cash flow. For example a chain of contractors - A supplying B supplying C supplying D (who is the end user), then the reverse charge applies to each stage apart from the supply from C to the end user D.
So A charges their services to B (say £1000) without VAT. So B only pays A £1000 not £1200 including VAT and B 'pays' the £200 VAT they should have been charged by A by including it on their VAT return. However as they claim the £200 back as usual on the same return they don't actually hand over the £200 VAT to anyone.
B then charges their services to C (say £5000) without VAT. The same as before applies, C only pays £5000 to B and not £6000 and 'pays' the £1000 VAT they should have been charged by B on their return and claims it back as usual so don't actually hand over the £1000 VAT to anyone.
C then charges their services to D, the end user (say £100,000). C does what they do now and issues a normal VAT invoice and pays over the £20,000 VAT on the invoice.
D then treats the VAT invoice from C as a normal VAT invoice.
For construction companies there are three impacts -
1. It means that at each stage the supplier needs to know whether their customer is an end user to know whether they should charge VAT or not.
2. It also means that companies will need to have careful controls over purchase invoice processing, to challenge any invoices that have VAT on them when they shouldn't (if they are not the end user).
3. It will likely have an impact on cashflow. For example A will no longer be receiving the £200 in the example, which they would be holding on to for up to three months before handing over to HMRC.
As mentioned, the benefit for HMRC is if A or B run away (which is apparently happening quite a lot), the VAT doesn't disappear with them. It is the same legislation which applies to supplies of mobile phones, computer chips, and other items where missing trader fraud occurs.
Teddy Lop said:
I'm on the flat rate scheme, how does this work for me.
Probably time to de reg and just stay below the threshold by any means possible I think.
www.gov.uk/guidance/vat-domestic-reverse-charge-fo...Probably time to de reg and just stay below the threshold by any means possible I think.
Suggests you will be worse off if you remain on the FRS as you won't be paid the VAT.
As for de-registering being worthwhile, depends on who your customers are and whether they are VAT registered or not. Trading just below the threshold can be risky and the financial penalties if you get it wrong are eye-watering.
PF62 said:
Close, but not quite correct.The responsibility to pay doesn't fall on the end user, but the person supplying the end user.
For example a chain of contractors - A supplying B supplying C supplying D (who is the end user), then the reverse charge applies to each stage apart from the supply from C to the end user D.
So A charges their services to B (say £1000) without VAT. So B only pays A £1000 not £1200 including VAT and B 'pays' the £200 VAT they should have been charged by A by including it on their VAT return. However as they claim the £200 back as usual on the same return they don't actually hand over the £200 VAT to anyone.
B then charges their services to C (say £5000) without VAT. The same as before applies, C only pays £5000 to B and not £6000 and 'pays' the £1000 VAT they should have been charged by B on their return and claims it back as usual so don't actually hand over the £1000 VAT to anyone.
C then charges their services to D, the end user (say £100,000). C does what they do now and issues a normal VAT invoice and pays over the £20,000 VAT on the invoice.
D then treats the VAT invoice from C as a normal VAT invoice.
For construction companies there are three impacts -
1. It means that at each stage the supplier needs to know whether their customer is an end user to know whether they should charge VAT or not.
2. It also means that companies will need to have careful controls over purchase invoice processing, to challenge any invoices that have VAT on them when they shouldn't (if they are not the end user).
3. It will likely have an impact on cashflow. For example A will no longer be receiving the £200 in the example, which they would be holding on to for up to three months before handing over to HMRC.
As mentioned, the benefit for HMRC is if A or B run away (which is apparently happening quite a lot), the VAT doesn't disappear with them. It is the same legislation which applies to supplies of mobile phones, computer chips, and other items where missing trader fraud occurs.
My bad - re definition of end user. For example a chain of contractors - A supplying B supplying C supplying D (who is the end user), then the reverse charge applies to each stage apart from the supply from C to the end user D.
So A charges their services to B (say £1000) without VAT. So B only pays A £1000 not £1200 including VAT and B 'pays' the £200 VAT they should have been charged by A by including it on their VAT return. However as they claim the £200 back as usual on the same return they don't actually hand over the £200 VAT to anyone.
B then charges their services to C (say £5000) without VAT. The same as before applies, C only pays £5000 to B and not £6000 and 'pays' the £1000 VAT they should have been charged by B on their return and claims it back as usual so don't actually hand over the £1000 VAT to anyone.
C then charges their services to D, the end user (say £100,000). C does what they do now and issues a normal VAT invoice and pays over the £20,000 VAT on the invoice.
D then treats the VAT invoice from C as a normal VAT invoice.
For construction companies there are three impacts -
1. It means that at each stage the supplier needs to know whether their customer is an end user to know whether they should charge VAT or not.
2. It also means that companies will need to have careful controls over purchase invoice processing, to challenge any invoices that have VAT on them when they shouldn't (if they are not the end user).
3. It will likely have an impact on cashflow. For example A will no longer be receiving the £200 in the example, which they would be holding on to for up to three months before handing over to HMRC.
As mentioned, the benefit for HMRC is if A or B run away (which is apparently happening quite a lot), the VAT doesn't disappear with them. It is the same legislation which applies to supplies of mobile phones, computer chips, and other items where missing trader fraud occurs.
PF62 said:
www.gov.uk/guidance/vat-domestic-reverse-charge-fo...
Suggests you will be worse off if you remain on the FRS as you won't be paid the VAT.
As for de-registering being worthwhile, depends on who your customers are and whether they are VAT registered or not. Trading just below the threshold can be risky and the financial penalties if you get it wrong are eye-watering.
I have a broad mix of clients, private customers won't be an issue but i guess the builders and garden/landscaping concerns I sub to will be paying the vat direct now? As I don't generally employ services I guess there's little else to do? Although one of them I pay "referrals" - would I pay the vat element direct to the vat man now?Suggests you will be worse off if you remain on the FRS as you won't be paid the VAT.
As for de-registering being worthwhile, depends on who your customers are and whether they are VAT registered or not. Trading just below the threshold can be risky and the financial penalties if you get it wrong are eye-watering.
The businesses I work for can manage me not being vat reg I think, I've been bumbling along just below the vat threshold for a few years now, I know full well not being vat reg when you should be is not a clever thing due to a complete d!ckhead accountant and it'd be sods law to de-reg only to have a bumper year.
I think de reg is the way forward. Annoying as I just bought a van (full vat relief on capex) I guess I'll have to account for that somehow on de-regging? Or wait till I sell which may be years?
Edited by Teddy Lop on Sunday 28th July 11:00
Can I just have a bit of clarification from those who understand this scheme please. Sorry for basic questions.
Let’s say I’m a plasterer. I have mainly domestic customers but also sub to a few builders here and there. My understanding is that I continue to charge vat as normal to my domestic customers and don’t charge it to the builders as they’re vat registered. Is that correct?
I still have to pay for materials which involves paying out a lot of vat so if I’m not charging the builders vat but have paid out for the vat on the materials, how do I claim the vat back?
I admit I’ve only just heard of this scheme and haven’t researched it much so have no understanding.
Let’s say I’m a plasterer. I have mainly domestic customers but also sub to a few builders here and there. My understanding is that I continue to charge vat as normal to my domestic customers and don’t charge it to the builders as they’re vat registered. Is that correct?
I still have to pay for materials which involves paying out a lot of vat so if I’m not charging the builders vat but have paid out for the vat on the materials, how do I claim the vat back?
I admit I’ve only just heard of this scheme and haven’t researched it much so have no understanding.
Douglas Quaid said:
Can I just have a bit of clarification from those who understand this scheme please. Sorry for basic questions.
Let’s say I’m a plasterer. I have mainly domestic customers but also sub to a few builders here and there. My understanding is that I continue to charge vat as normal to my domestic customers and don’t charge it to the builders as they’re vat registered. Is that correct?
Yes.Let’s say I’m a plasterer. I have mainly domestic customers but also sub to a few builders here and there. My understanding is that I continue to charge vat as normal to my domestic customers and don’t charge it to the builders as they’re vat registered. Is that correct?
The domestic customers you would charge VAT as normal.
For the VAT registered builders, if your service would need to be reported under CIS then you don't charge VAT - www.gov.uk/guidance/vat-domestic-reverse-charge-fo...
Douglas Quaid said:
I still have to pay for materials which involves paying out a lot of vat so if I’m not charging the builders vat but have paid out for the vat on the materials, how do I claim the vat back?
You would claim it back on your VAT return as you would do now (assuming you are not on the Flat Rate Scheme), just there will be no VAT on sales to pay HMRC so you will be getting repayments back from HMRC.^^ So domestic customers (people paying for extensions or refurbs) would just pay the VAT as normal to the builder? Although if the builder had a contract with a VAT registered company eg sometimes "customers" set up jobs in the name of a company rather than themselves (still extensions or refurbs) then the customer would pay the VAT to HMRC?
TX.
TX.
Terminator X said:
^^ So domestic customers (people paying for extensions or refurbs) would just pay the VAT as normal to the builder?
Yes. Nothing changes from now for non-VAT registered customers, the builder continues to charge VAT and pay it to HMRC on their VAT returnTerminator X said:
Although if the builder had a contract with a VAT registered company eg sometimes "customers" set up jobs in the name of a company rather than themselves (still extensions or refurbs) then the customer would pay the VAT to HMRC?
The customer would need to be VAT registered AND the service must be one that needs to be reported under CIS for the new rules to apply. If the customer, although a business is not VAT registered or the service is not one that needs to be reported under CIS then the existing rules still apply and the builder charges VAT.
If the criteria for the new rules are met then the responsibility to pay the VAT moves from the supplier to the customer. The customer does pay the VAT to HMRC on their VAT return, but then claims it back if they can - the normal rules apply to the claim - using it for a VAT taxable purpose then claim the VAT, using it for a VAT exempt purpose or a non-business purpose then don't claim the VAT.
What it means for construction companies is they need to know more about their customer to make the correct decision on whether to charge VAT or not.
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