From 1 October 2019, a reverse VAT charge will apply to “construction operations”. This will encompass a wide scope of the industry including construction, demolition, engineering and M&E services. It will not apply to professional services ancillary to the “construction operations”, such as design.
In essence, the onus will be upon the main contractor to charge for and report the applicable VAT, which will be paid by the end user. The supply chain engaged by the main contractor will not charge VAT 'upwards', to the extent their engagement relates to “construction operations”.
A number of difficulties may arise. For example, given the layered and complex nature of construction finance, will the end user be readily identifiable? Further, what happens when the supply chain is providing a mixture of services, some of which (but not all) are “construction operations”?
The reverse charge is likely to have a significant impact on the industry from a reporting perspective but also in relation to cash flow management, particularly for the supply chain. Instead of just passing the VAT on, this could also be a minefield for main contractors to navigate. Businesses will need to ensure that they are ready to go for 1 October.
If you need help with this, do get in touch.