The way VAT is administered for businesses in the construction industry is changing from 1 October 2019. Organisations operating in this sector need to plan for these changes now so they are ready when the new rules take effect.
The new rules means that the customer (i.e. the one making payment for construction services) in the transaction will now become responsible for accounting for VAT. Further detailed guidance is expected from HMRC before this legislation becomes effective on 1 October 2019. Interim guidance has been published and can be seen at this link.
UPDATE - HMRC have published their updated version of the guidance which you can see here.
The rules will only affect payments that are made where both parties are within the scope of the Construction Industry Scheme (CIS). Where a sale is made to an "end user" (a business that does not make supplies of construction services or a private customer) then the existing VAT rules will continue to apply.
When a payment is affected:
The system of "reverse-charging" for certain business types has been around for quite a while, and is used as a measure to combat loss of VAT through fraud. The construction industry is being added to the list of businesses that are within the scope of the rules.
One thing to note is that there is no lower limit for affected construction businesses (unlike some other reverse charge businesses). Any business working in the construction industry will need to understand these rules and when they should be applied. A business that uses the VAT Flat Rate Scheme cannot include affected reverse charge transactions in the accounting for that scheme.
If you would like help understanding these new rules please let us know.