From 1st October 2020, HMRC are introducing a new reverse charge concept into the construction industry. The construction industry has been notorious for ‘missing trader’ or carousel fraud, HMRC originally brought in a specific scheme called ‘Construction Industry Scheme’ to tackle fraud and are now turning their focus to VAT within the construction industry.
HMRC have recognised that the company’s in the middle of supply chains – those that are supplying sub-contractors – charge their customers a higher rate than the rate amount charged by the sub-contractor, creating a cash surplus in the business, this difference is payable to HMRC, but this is not being recovered and the trader goes ‘missing’ or allows their business to be struck off so the VAT is never recovered.
HMRC are looking to implement a reverse charge mechanism similar to the treatment of the cross border (EC) reverse charge mechanism. The proposed treatment is aiming to cut out any VAT in the supply chain for the construction industry, the concept will be for the customer in the supply chain to charge output VAT to their customer, but recover input VAT on the same transaction creating a net effect of zero.
This new concept is only applicable if the following is met:
- The VAT supply is made up of construction services or materials, not supply of labour, such as employment agencies.
- The transaction is between UK VAT-registered supplier and UK VAT registered customer
- The customer and supplier are registered under the construction industry scheme.
- The supplier and customer are not connected.
Joe Blogs works for Company A and invoices company A on a monthly basis in line with their contract totalling £1000. The VAT payable on top of this invoice to HMRC will be £200.
Joe Blogs outsources this contract to company B who are the end client, they charge £600. The VAT recoverable for Joe is £100.
HMRC would therefore be due a payment from Joe totalling £100, however this surplus is not being recovered due to missing trader or counsel fraud.
The idea is that under the new concept, Joe Blogs will charge company A the net invoice (without VAT), Joe Blogs will then report this as output VAT (box 1) and input VAT (box 4) on their VAT return. The end client (company B) will be required to charge VAT to company A, as they are the end client in the supply chain.
When invoicing, HMRC have stated that you must make it clear that this invoice is subject to reverse charge mechanism, no VAT is charged on the invoice and it should show how much VAT is due under reverse charge concept. HMRC are looking to work with businesses with implementing this concept, providing a 6 month soft landing period following 1st October 2020.
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