VAT: Letter on reverse charge for builders

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Neil Warren has prepared a draft letter for accountants to send to clients affected by the new reverse charge rules that are being introduced for the construction industry on 1 October 2019.

“The reverse charge is very difficult for our builder clients to understand,” said one frustrated accountant to me recently. “Is there any chance you could draft a letter spelling out the new rules in plain English that we can send out to them over the next few weeks?”

In James Bond style, my mission was duly accomplished (helped by a couple of glasses of wine, shaken but not stirred) and I thought it would be good to share my end result with AccountingWEB members. After all, why reinvent the wheel?

* * *

[To: Clients involved in construction services]

Dear Bob the Builder,

VAT: NEW ACCOUNTING PROCEDURES FOR BUILDERS – 1 OCTOBER 2019

You might have read that new procedures are being introduced on 1 October 2019, which affect any VAT-registered construction business that does the following:

  • Buys in construction services from other builders and makes an onward supply of those services to another customer eg where a subcontractor invoices the main contractor on a project, and the main contractor invoices the final ‘end-user’ client.
  • Sells construction services to other builders where the builders make an onward supply of the services to their customer.

What is changing?

Under current rules, a builder charges VAT to their customer, collects the VAT from the customer and accounts for it in Box 1 of their relevant VAT return.

This is changing for supplies between VAT-registered builders. The builder will invoice their builder customer without charging VAT and the customer makes the Box 1 entry instead on their own VAT return.

In effect, there will be no cash flow issue for the builder receiving services because the same amount of VAT declared in Box 1 will also be included as input tax in Box 4: ie a nil effect overall. This is known in VAT speak as a “reverse charge” procedure.

Reason for change

HMRC has identified that certain builder supplies have been prone to VAT fraud, where the supplier charges VAT to his customer, receives money for this VAT from the customer but never declares it on a VAT return. The new procedures aim to prevent this from happening because the supplier is never paid VAT in the first place.

Which sales are caught by the new rules?

The new reverse charge procedures will apply to the following transactions:

  • The legislation refers to “specified services” but these do not apply to services supplied to non-construction businesses, such as a retailer having their premises improved or any other end-user customer or building owner;
  • The reverse charge will also apply to any goods supplied by the builder as part of their work;
  • Employment businesses are excluded from the new rules;
  • The reverse charge is based on the rate of VAT that applies for the work in question but only supplies subject to either 5% or 20% VAT. Zero-rated sales are excluded.
Example  

Mike is an electrician, VAT registered as a sole trader. He is doing some work on an office block, invoicing the main contractor Steve for his work.

Steve is also VAT registered, and will then invoice the building owner. Steve is not an “end-user” because he is making an onward supply of construction services to his own customer. He is an “intermediary supplier”.

The invoice raised by Mike will be subject to the new procedures ie no VAT is charged. Let’s say the value of his work including materials will be for £5,000:

Mike’s VAT return will only include the value of the sale in Box 6 (outputs) of his VAT return:

  • Box 6 – outputs - £5,000

Steve will do the reverse charge calculation and make the following entries on his return:

  • Box 1 – output tax £1,000 (ie £5,000 x 20%)
  • Box 4 – input tax - £1,000 (same figure as Box 1)
  • Box 7 – inputs - £5,000 (net value of payment made to Steve)

Other issues to consider

Taking the Steve and Mike example a stage further, they each have their own responsibilities with the new rules.

Mike must ensure that Steve is both registered for the CIS (Construction Industry Scheme) and also has a valid VAT number.

Mike must also specify on his sales invoices the amount and rate of VAT that Steve must declare with the reverse charge ie 5% or 20% VAT.

Mike should include wording on the sales invoice along the lines of: “Reverse charge: customer to pay the VAT to HMRC.”

Steve must tell Mike if he is an “end-user” or “intermediary supplier”. If he is an intermediary supplier, then Mike will not charge him VAT because the reverse charge applies.

It is important that Steve does not pay VAT incorrectly to Mike because HMRC could raise an assessment for the VAT that he should have declared, ie as if the reverse charge had been done correctly.

Here are a few other points to consider:

  • Checks should be applied to ensure building contractor clients  invoiced under the new rules are properly registered for VAT and are bona fide. Section 9 of HMRC VAT Notice 735: Domestic reverse charge procedure gives further information.
  • HMRC suggests that if there are any doubts about the credentials of a builder customer, then a deposit equal to the amount of VAT not being charged should be collected from the customer eg if they have applied for but not received a VAT number.
  • VAT Notice 735 mentioned above gives examples of customer checks that should be considered at para 9.3.1.

Penalties issued by HMRC for errors

HMRC has confirmed that penalties will not be charged for mistakes with the new procedures up until 31 March 2020, the exception being if “you are deliberately taking advantage of the measure by not accounting for it correctly.”

Summary

I hope this letter gives you an idea about the key issues to consider with the new rules but please let us know if you have any questions.

Yours sincerely,

[Your accountant]

* * *

Conclusion

Detailed HMRC guidance on the reverse charge for building and construction services was issued in June and discussed by Linda Skilbeck on this site.

The latest update to this guidance encourages traders to:

  • check whether the reverse charge affects either sales, purchases or both;
  • make sure accounting systems and software are updated to deal with the reverse charge;
  • consider whether the change will have an impact on cash flow; and, 
  • make sure all staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate.

As the old saying almost goes, the (wrecking) ball’s now in your court!

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

Replies

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By thacca
19th Jul 2019 11:56

Too Late! I sent my letters yesterday. What a shame, I'm sure your letter is better than mine.

I understand the reason why this is being done and completely agree that it should cut out a significant amount of VAT fraud. However, I anticipate this is to be the most problematic change I have seen. Much worse than MTD (the hardest part was setting up the agent services account). I'm not looking forward to October and the countless conversations we are going to have with builders bookkeepers (their wives) about how the rules work.

Thanks (5)
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19th Jul 2019 12:36

Oh dear. I’m not sure this really meets the brief of a simple explanation.

I do understand the new rules and I find that letter heavy going. If I were in practice, I would be doing something along the lines of:

Dear Bob

NEW VAT RULES FOR BUILDERS
The way you need to deal with VAT is changing for VAT-registered builders and contractors.

WHAT YOU NEED TO DO DIFFERENTLY
- if you’re not VAT registered: Nothing. (reminder – you may need to VAT register if your income for labour and materials is more than £83,000 a year)
- if you are VAT registered
---- when paying sub-contractors who are not VAT-registered – nothing
---- when buying materials – nothing
---- when paying sub-contractors who are VAT registered – new rules apply
--- when billing contractors who are VAT registered – new rules apply

NEW RULES
I’d then go on to explain the VAT accounting. I’d include an example invoice showing the reverse charge wording.
I’d also explain that this is just an admin change aimed at fraud prevention and that it doesn’t have any financial impact.

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to paul.benny
19th Jul 2019 12:48

paul.benny wrote:

I’d also explain that this is just an admin change aimed at fraud prevention and that it doesn’t have any financial impact.

Worth warning them about the cash flow impact, though.

Thanks (3)
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to lionofludesch
22nd Jul 2019 09:51

Agree

Thanks (0)
to paul.benny
22nd Jul 2019 11:00

paul.benny wrote:

Oh dear. I’m not sure this really meets the brief of a simple explanation.

I do understand the new rules and I find that letter heavy going. If I were in practice, I would be doing something along the lines of:

Dear Bob

NEW VAT RULES FOR BUILDERS
The way you need to deal with VAT is changing for VAT-registered builders and contractors.

WHAT YOU NEED TO DO DIFFERENTLY
- if you’re not VAT registered: Nothing. (reminder – you may need to VAT register if your income for labour and materials is more than £83,000 a year)
- if you are VAT registered
---- when paying sub-contractors who are not VAT-registered – nothing
---- when buying materials – nothing
---- when paying sub-contractors who are VAT registered – new rules apply
--- when billing contractors who are VAT registered – new rules apply

NEW RULES
I’d then go on to explain the VAT accounting. I’d include an example invoice showing the reverse charge wording.
I’d also explain that this is just an admin change aimed at fraud prevention and that it doesn’t have any financial impact.

I think your punchier style is more helpful with most builder clients - cash flow considerations notwithstanding.

It's gonna be a real mess, he wrote politely.

Thanks (2)
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By NH
to paul.benny
22nd Jul 2019 12:36

Yes have to agree, even your dumbed down version is highly unlikely to be read by clients, they will read "new VAT rules" and put it with the rest of the crumpled up receipts they keep in the van!
It is far more likely that the way they invoice will be dictated to them by the contractor

Thanks (1)
to NH
22nd Jul 2019 15:00

You lads need to get your clients properly trained.

Thanks (1)
19th Jul 2019 12:47

Yes - I did mine last month.

Thanks (0)
19th Jul 2019 20:05

Thank you Neil

I shall be adopting your template very gratefully!

Thanks (0)
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21st Jul 2019 21:26

I’d send our clients a letter but they won’t read them and will just ring to ask what it’s all about anyway so easier to just explain on the telephone!

Thanks (6)
to bigmuggsy
21st Jul 2019 22:03

bigmuggsy wrote:

I’d send our clients a letter but they won’t read them and will just ring to ask what it’s all about anyway so easier to just explain on the telephone!

Sure - if they get to hear about it from a bloke in the pub.

It doesn't sound like they'll be hearing about it from you.

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to lionofludesch
22nd Jul 2019 09:58

So are you checking with all the people you wrote to that they understood your letter? A good proportion of them are likely to not even read it in the first place.
I think we need to speak to people at least about this. I will send a letter, but because most won't read it I'll need to schedule a call in addition. The letter's the easy bit.

Thanks (3)
to Moonbeam
22nd Jul 2019 11:10

All but one of mine have already responded.

What you need is an attention catching heading to your letter.

Thanks (0)
23rd Jul 2019 14:31

The key issues for the client are completely missed by this letter

These are:

1. check to see if need to switch to monthly returns to obtain VAT refunds else your cash flow will be f**ked!

2. check to see if need to switch to invoice accounting as cash accounting probably not best now as no VAT on sales to defer therefore bringing forward the claim for input VAT makes sense.

This is probably the worst piece of VAT legislation ever in terms of destroying the construction industry but one simple tweak would rectify this - make CIS gross status businesses exempt from it.

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22nd Jul 2019 11:45

And the big problem is I have yet to find a builder who knows how to "include the value in Box 6 of your VAT return", or indeed any box.
The software issue of how to do it is actually the complicated one, and worse still your letter, while excellent, is only half of what they have to do, in the sense that they also need to amend their invoices to show the VAT amount without including it in the total. Xero has a function that comes close to doing it, Kashflow has a pair of work-runarounds, but I cant get Quickbooks to do it properly on both invoice and VAT return without double invoicing everyone, and Sage's help lines suggested solution actually breeches MTD rules.

And has anyone else noticed that the Statutory instrument bringing this in does not actually mention CIS, but applies to all construction work. It is a HMRC policy issue to only apply it to CIS work, which I know is nearly all construction work, but not actually all.

Thanks (1)
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By Vjacob
to timothyvogel
23rd Jul 2019 14:41

I just had a response from Xero that they are working on rolling out a solution for this, but they don’t have a timeframe for release. That potentially doesn’t leave us in a great place for complying with MTD and reverse charge... it would be nice if HMRC talked to the MTD approved software companies to ensure their timeframes are achievable before rolling out the deadline...

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to Vjacob
23rd Jul 2019 15:19

This has been known about for 9 months.

Eight of those have been eaten up by HMRC not coming up with the parameters.

Of course, if the software can't cope, we know whose fault it'll be. The poor old trader's.

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22nd Jul 2019 12:02

Steve does not receive the VAT? Can you expand? Why is he not the end user?

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to mikeyban
22nd Jul 2019 15:09

mikeyban wrote:

Steve does not receive the VAT? Can you expand? Why is he not the end user?

EDIT

I confused my Steves and Mikes earlier.

How would Steve receive VAT if he's the customer ?

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to lionofludesch
22nd Jul 2019 16:14

Am I reading this wrong?

Steve is the contractor who has the job to do on a building for the building owner.

Mike is Steve's subcontractor.

Will not Steve charge the customer Vat as he is at the end of the chain?

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to mikeyban
22nd Jul 2019 16:39

Steve will charge his customer VAT, yes.

But the customer is the end user. Steve won't be using it.

Thanks (0)
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to lionofludesch
22nd Jul 2019 16:45

Thank you.... that was the part I was missing.... Steve will still have an entry for the output he will charge the building owner as well as the reverse charge....

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to mikeyban
23rd Jul 2019 15:36

mikeyban wrote:

Thank you.... that was the part I was missing.... Steve will still have an entry for the output he will charge the building owner as well as the reverse charge....

Steve will charge VAT because his supply is (more than likely) not within the CIS, so the reverse charge won't enter his thoughts.

Or shouldn't......

Thanks (0)
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22nd Jul 2019 12:53

I do the invoicing for my client who will be affected by this, so presumably the invoice should read as follows:

-----------------------------
To the contractor

250m fencing labour only @ £8 per metre £2000.00
VAT @ 20% 400.00

Total due £2000.00

Reverse charge wording.

----------------------------

Obviously I will have checked that the contractor is not the end user. Looks like I will need to set up an excel template as my current invoicing software won't be able to cater for the reverse charge.

Thanks (0)
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22nd Jul 2019 13:40

Sledgehammer to crack a nut....

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22nd Jul 2019 13:41

Am I to understand then that where my builder client is only involved in 'New Build' construction the new procedure would not apply?
If that is the case dishonest subcontractors may still be allowed to fraudulently charge VAT.
So why exclude Zero rated supplies to the end user?

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to Christop51
22nd Jul 2019 15:03

Zero rated supplies aren't affected.

Not sure how you can fraudulently charge VAT at 0%. I fear you've misunderstood the rules.

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22nd Jul 2019 14:01

'Mike must ensure that Steve is both registered for the CIS (Construction Industry Scheme) and also has a valid VAT number.'
Whilst it may be possible for my client check if the VAT no is a valid one, it doesn't mean it is genuine. Is there a way to confirm it is genuine?

Thanks (0)
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22nd Jul 2019 14:01

'Mike must ensure that Steve is both registered for the CIS (Construction Industry Scheme) and also has a valid VAT number.'
Whilst it may be possible for my client check if the VAT no is a valid one, it doesn't mean it is genuine. Is there a way to confirm it is genuine?

Thanks (0)
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By sutton
to Christop51
22nd Jul 2019 14:24

http://ec.europa.eu/taxation_customs/vies/ - it provides the name of the business if you enter a valid vat registration

Thanks (2)
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to sutton
22nd Jul 2019 15:05

There was me thinking we were about to leave the EU - but we don't have our own mechanism for checking whether UK VAT numbers are legitimate or not.

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to bendybod
22nd Jul 2019 15:57

Nothing's certain yet.

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to sutton
31st Jul 2019 02:01

Until OctExit when incidentally the new procedures kick in. Coincidence?

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22nd Jul 2019 14:09

bigmuggsy is correct. Neil's letter, although accurate, is just too long and complicated for my clients.

So I'm intending to use Paul's version (hope you dont mind ... copyright etc! :)) but under New Rules I am just going to say that if they are intending to pay sub-contractors who are VAT registered or bill contractors who are VAT registered then get in touch with me before they do so.

I do their VAT returns so no problem trying to teach them what to do

If they ignore you then be it on their head but at least you have covered yourself.

Thanks (3)
to Jennifer Adams
22nd Jul 2019 14:56

Jennifer Adams wrote:

I do their VAT returns so no problem trying to teach them what to do

You do their invoicing as well, then ?

Because that's where they're going to need to know on a day to day basis.

Thanks (0)
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22nd Jul 2019 16:57

The rules will probably change umpteen times between now and the 1st October so we are not writing to affected clients until September.

Yet more crazy VAT rules.

Thanks (1)
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24th Jul 2019 11:25

Am I missing something here. For a temporary solution the sub contractor issues a zero rated EC invoice which will state it's subject to reverse charge. The contractor then processes the invoice as reverse charge vat

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to peterpaice
24th Jul 2019 12:33

peterpaice wrote:

Am I missing something here. For a temporary solution the sub contractor issues a zero rated EC invoice which will state it's subject to reverse charge. The contractor then processes the invoice as reverse charge vat

Yes - the sales will go in the wrong box.

Not sure I'm all that bothered about it.

Nevertheless, here's a great example of something that would be a doddle if only we hadn't got this MTD blocks to deal with.

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24th Jul 2019 12:02

Hi
Just read Neil's opener and all the comments thereafter. Generally concur with most of it :-(
Just another PITA [pain in......]
Vat verficiation - Nice but what happens if we do eventually leave the EU. Why can't HMRC provide the same service for VAT reg'ns as they do for CIS. You'd never guess the Inland Revenue and C&E ever merged into HMRC! By name only it appears to me.

Builder client only does new build residential properties so Zero supply and currently files mthly Vat rtns. My query is as far as the vat reg'd subcontractor is concerned is the builder the end customer in which case charge Vat or not the end customer in which case reverse charge. I appreciate most will be already invoicing at Zero anyway.

Cashflow - As far as I can see it can only have positive affect on cashflow and as someone has already suggested for some subbies at least a change of basis and/or qtrly to mthly should be considered

Letter - We have written to our clients as yet and may well open with the simple version offered [thank you] and incoporate some of Neil's for those who fancy a more in depth version [thank you]. But like others we'll no doubt have to speak the clients as well. The good news is we submit all of said clients Vat rtns, do the book-keeping for some but as again already stated the key issue is the sales invoice changes.

Interesting times ahead, will the software companies provided in time? Like with HMRC I'm not holding my breathe

Happy days ;( ;-(

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to markabacus
24th Jul 2019 12:42

markabacus] <p>Hi</p> <p>Builder client only does new build residential properties so Zero supply and currently files mthly Vat rtns. My query is as far as the vat reg'd subcontractor is concerned is the builder the end customer in which case charge Vat or not the end customer in which case reverse charge. I appreciate most will be already invoicing at Zero anyway.</p> <p>{/quote}</p> <p>If the builder lives in the house, he's the end user. If he doesn't live in the house, he isn't the end user. The end user is the bloke who does live in the house. He's the one using the house.</p> <p>[quote] <p>Cashflow - As far as I can see it can only have positive affect on cashflow ...{/quote]</p> <p>Well, that depends whether you're contractor or subcontractor, does it not ?</p> <p>[quote wrote:
...and as someone has already suggested for some subbies at least a change of basis and/or qtrly to mthly should be considered

If there's no cash flow disadvantage, as you claim, why would they want to be changing to monthly returns ?

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24th Jul 2019 14:58

Previous comments were to consider the impact on cashflow which to me generally means a warning of a detrimental affect but on considering it I can only see a positive one as I wrote.
Ah, I think the penny has dropped [must be the heat] the subbies are paying Vat out but nothing coming in if all their sales are covered by the reverse charge.

BTW re Replies - I've not been on here for ages and I can't remember if it has always been like this but it's a real pain when I click on replies and you end up at the top of the listing whilst what I really want to see is the last 1 or 2 threads which is probably what i'm replying too. Is there a setting somewhere to change this?

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25th Jul 2019 10:10

In your example, is Steve's customer (the building owner) also VAT registered and in the CIS?

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to kafaccounting
25th Jul 2019 10:38

Whose example ?

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to lionofludesch
25th Jul 2019 10:50

The example included in Neil Warren's 'VAT: Letter on reverse charge for builders'

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to kafaccounting
25th Jul 2019 11:10

The example is about the contract between Steve and Mike.

The contract between Steve and his customer is irrelevant to that.

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By M GD
29th Jul 2019 12:22

If I were a builder client I would be as confused as ever reading your articles. Nobody has clarified, who, under the new rules should be charging vat to the end user, the customer.

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to M GD
29th Jul 2019 13:09

The bloke who makes the supply to the end user.

How clear does it have to be ?

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29th Jul 2019 13:07

Great letter I thought on what can appear a complex area. As for the critics who say it needs dumbing down - all clients are not the same and so style and manner of communication needs tailoring. Notwithstanding, clients have short memories (and getting shorter!) and so sending something like this out rebuts the argument - "you never told me about this". The old adage tell "Tell them what you are going to tell them (telephone), tell them (letter) , then tell them what you told them (email)" can be well applied in an world when there is so much noise out there.

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