Reverse Charge VAT in the Construction Industry

[Hoagy]

From the 1st September we are going to have a new VAT regime in construction.
As a sub-contractor when I issue an invoice to a main contractor I won't be adding VAT to the amount.
The main contractor will instead account for the VAT in his sales and claim it back in his purchases.
His invoice to the client will include VAT for all the subcontract works as before.
So the net effect on subbies is that our sales VAT will be zero while we will still be reclaiming purchases VAT, so we'll be getting rebates instead of making payments with each return.
Has anyone any idea why they've made this change and where the benefit to Revenue is?
It's all there on the Revenue site.

 

[Past30Now]

Revenue carried out the Construction Industry Project in 2006. They allocated 25% of their audit resources to the construction industry and reached 10% of the industry as a whole. One of the major findings of the report, was the leakage of VAT within the industry. This is typified by a subbie invoicing a principal contractor for work carried out plus VAT , the Principal would offset this VAT against its own liabilities (as expected), and in most cases the subbie would return the VAT received to revenue, less any appropriate inputs.

There was an unexplained gap between the amounts claimed by the principals and submitted by the subcontractors. By introducing the reverse charge VAT mechanism, they are dramatically reducing the numbers of people collecting the VAT on behalf of revenue within the construction industry, thus making collection easier. The numbers involved are approximately 112,000 subbies who are not also principal contractors.

Past30

 

[Hoagy]

Thanks for that.

There was an unexplained gap between the amounts claimed by the principals and submitted by the subcontractors.

I suppose that'll be because the builders didn't pay the subbies but still reclaimed the VAT on their invoices.

 

[Graham_07]

Thanks for that.



I suppose that'll be because the builders didn't pay the subbies but still reclaimed the VAT on their invoices.

Or because some subbies might not have paid over all the VAT they should have.

 

[ubiquitous]

Or because some subbies might not have paid over all the VAT they should have.

The anecdotal stories I have heard on this subject have been along these lines.

 

[Hoagy]

Or because some subbies might not have paid over all the VAT they should have.

Ah no, we're all honourable fellows...

 

[Graham_07]

This whole departure from established VAT accounting is interesting. Yes construction has probably problems of this sort, but so would other industries. Revenue may want to adjust cash flows, improve compliance but why stop with construction. What about all the other areas where both seller and purchaser are VAT registered. Many other sectors could argue it's a waste of time & effort paying over €x VAT and the customer claiiming €x VAT. Even further, with smaller businesses being granted longer VAT periods, you could have the customer claiming credit bi-monthly and the seller only accounting quarterly, or half-yearly or even annually. Take accountants for example, I'd say 95% of my clientele are VAT registered. I have to collect the VAT, pay to Revenue , client claims credit, all going round in a circle. But up to now that's the way it was and everyone knew where they stood. You didnt have different VAT accounting for one part of your business or another. The subbie in construction now has to deal with VAT for principals and end-user customers differently. It's going to lead to problems.

 

[Past30Now]

Its also an admission by Revenue that they cannot effectively police the construction industry much in the same way that the PAYE credit is an admission that the self employed and proprietary directors "get away" with paying less tax than the ordinary employee.

The effects on the subbies will be in cashflow terms both immediately and into the future. They will be paying the VAT on their inputs upfront and will not receive the refund for on average 6 weeks after the payment. Also when paying their VAT for July/August, they will no longer be in receipt of VAT inclusive payments from their principal contractors, and as such may suffer a further cashflow disadvantage.

Another area of concern is that Revenue may have an extra 500,000 VAT refunds to process annually, which will lead to delays unless they are moving staff to these areas to deal with the extra workload.

All in all it is bound to be a bit of a mess.

 

[jasper24]

Q:-

If we are contracted by another ( A) to do work on their behalf to ( B) do we charge vat in the invoice to A or will A charge it directly to B and we charge 0 rate on the origional invoice?

 

[Graham_07]

Q:-

If we are contracted by another ( A) to do work on their behalf to ( B) do we charge vat in the invoice to A or will A charge it directly to B and we charge 0 rate on the origional invoice?

If you are a sub-contractor in construction and
if the other (A) is a principal in construction and
if (B) is (A)'s customer
then you are in a construction sub-contract and you do not charge (A) VAT. (A) self-accounts for the VAT as a sale and an input credit (cancels out)
You must put the prescribed wording on your invoice. see the new VAT rules booklet here ( about 1/2 way down page under "Reverse charge" )

 

[jasper24]

another question

If we use dual vat and currently charging 13.5% but some of our goods are 21% can we charge 13.5% or should we split ?

 

[Graham_07]

another question

If we use dual vat and currently charging 13.5% but some of our goods are 21% can we charge 13.5% or should we split ?

In construction services the "two-thirds rule" must be observed for 13.5% to apply unless you decide to apply the Revenue concession to charge relevant rates to each part of the transaction. In splitting the relevant portions must be realistic, i.e. no "loading" of the lower rate element to achieve lower VAT on the transaction at the expense of the standard rate element. This is especially important where the customer is the end user and does not have a VAT credit to claim on your work as the VAT paid on those transactions is a net inflow to the exchequer. There are also some exceptions to the two-thirds rule where the 21.5% rate must always apply ( e.g. a fridge supplied as part of a fitted kitchen)

If the transaction is subject to the reverse charge rules, i.e. a construction sub-contract, ( as mentioned in other posts above) then the two-thirds rule does not apply as no VAT is being charged by you.

It would be very important to check that what you are doing is correct for your circumstances so a discussion with your accountant/tax advisor would be highly recommended. Remember charging of incorrect VAT rates leaves the trader open to pay the VAT and interest/penalties on the matter being discovered at Revenue audit.

addition :- I have a hard copy of a Revenue statement of practice on VAT in construction. It gives very clear guidance on all these matters. I know it was on the Revenue site before for download. I've tried to locate it on the newly redesigned Revenue site but it does not seem to be there. Your accountant may have a copy, ask them.