There is soon to be new VAT legislation which will change how VAT is accounted for within the construction industry. It is expected to be published in October 2018 and take effect on 1 October 2019. Once in force it will generate significant changes for this industry sector.
In summary, the changes will mean that in a supply chain of construction services, the supplier will no longer charge VAT on the payment it receives. Instead, it will be the customer who is required to self-account for VAT. The reason for these changes is to tackle VAT fraud in the construction industry, this being where in a supply chain, an entity disappears without paying the VAT it has charged over to HMRC.
In the main it will apply to sub-contractors charging other sub-contractors (or the main contractor) for their supply of construction services i.e. business to business construction services from contractor to contractor.
The customer will self-account for VAT via a ‘reverse charge’. This works by the purchaser charging itself VAT, if VAT is applicable to the supply of services it has purchased. The purchaser does this by adding VAT to the purchase and accounting for it in its VAT return, as if it was a sale made by them. The VAT accounted for can then be recovered by the purchaser in the same VAT return, to the extent that it is able to recover VAT on the cost in question. Under these circumstances it becomes a mere accounting exercise and there is no net VAT liability.
There will be some exceptions. For example, the main contractor invoicing the developer of a construction project will account for VAT (where applicable) in the normal way, as the developer is not using the purchased construction services to provide further construction services. Also, a private person, who commissions building/construction work on their own private property, will be charged VAT in the normal way. Please note, connected parties will also be excluded from the new rules.