Businesses are constantly evolving to adapt to changing markets. The tax system similarly changes to keep up with new business structures and innovative ways to avoid tax.

One such tax avoidance trick, which is perceived to be a particular problem in the construction industry, is when firms charge and collect VAT, but disappear before they pay that VAT over to HMRC. The solution is a ‘reverse charge’ mechanism that will apply to builders, contractors and other trades associated with the building industry.

From 1 October 2019 those VAT-registered building firms will be required to charge themselves VAT when they buy building-related services from other firms in the construction industry.

It will work like this: Firm A does work for Firm B, and both are VAT registered. Firm A will issue an invoice to Firm B that says its services are subject to a reverse charge. Firm B adds the VAT that A would have charged to the cost of the work undertaken by A, but only within its own VAT records. Firm B does not pay the VAT to Firm A, but instead pays the VAT directly to HMRC.

There are a ream of exemptions from this new reverse charge system, such as where A and B are landlord and tenant, or are companies within the same group. We can help you sort out when you may need to apply the reverse charge.

One challenge will be to ensure that your accounting software deals with the new reverse charge correctly.

This comes on top of the other major changes to VAT this year: Making Tax Digital (MTD), which applies for most VAT-registered businesses for VAT periods beginning on or after 1 April 2019. However, some businesses have a deferred start date for MTD, being the first VAT period beginning on or after 1 October 2019. This is the same day that the construction industry reverse charge starts!

VAT returns are the first to be automated under the MTD banner, and conversion of other types of tax returns to full MTD automation is expected. However, in the Spring Statement on 13 March 2019 the Chancellor announced that no other taxes would be drawn into MTD in 2020. This marks a slow down in the MTD program, which is welcomed, as with everything else going on, businesses have quite enough to cope with!