HMRC has published draft legislation for a domestic reverse charge for construction services to be introduced from 1 October 2019. Their Guidance can be found here
In simple terms, the effect will be that any sub-contractors working to a main contractor will not have to charge/account for VAT on supplies to main contractors or other intermediate contractors, if the supplies are within the scope of CIS (Construction Industry Scheme).
The measure will probably make life easier for the sub-contractors who will not charge VAT to main contractors, but the result will probably be that sub-contractor businesses will all become VAT repayment traders as the input VAT will exceed the output VAT – there won't be any output VAT if all supplies fall within the reverse charge rules or are zero rated.
For the main contractor, there will be no adverse effect as such, as the output VAT and input VAT will fall in the same VAT period, and will always be fully recoverable, as the main contractor will always be making an onward reverse charge supply or a taxable onward supply, whether standard rated, zero rated or reduced rate. The important bit is that there should be no more risk of sub-contractors incorrectly charging standard rate VAT on what should be a zero rated or reduced rate supply.
IMPORTANT CONSIDERATIONS
The drafting of contracts that will run beyond October 2019 may need to be reviewed.
Any sub-contractors who are currently on the VAT Flat Rate Scheme should leave the scheme before October 2019 if they will fall within this regime from 1 October 2019
Subcontractors must ensure that all VAT returns and payments covering periods ending before the 1 October 2019 change are up to date, otherwise the subsequent VAT repayment claims will be withheld by HMRC.
If you need further guidance, please do contact Alison Sampson our dedicated VAT Consultant on 01273 485083 alisonsampson@knilljames.co.uk