Andrew Laurie, tax manager at Aberdeen-based Hall Morrice, said the change will impact on 150,000 UK organisations and could lead to cash-flow issues.

The VAT domestic reserve charge for building and construction services comes into effect in October. This means the customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier.

Mr Laurie said that advance preparation will allow construction firms to seamlessly integrate the reforms and will give them time to consider how this could impact on their cash flow after October.

He said: “Under the new system, a UK VAT registered customer in receipt of standard or reduced rate services that are normally reported through the Construction Industry Scheme (CIS) must account for VAT as a domestic reverse charge rather than the supplier account for VAT on its supply.  

“The domestic reverse charge is a mechanism whereby the customer accounts for VAT as though it made the supply and then is able to deduct the VAT as input tax – this will normally result in no net tax payable to HMRC by the customer.    

“As the VAT amount must still be shown on invoices subject to the domestic reverse charge, the risk is that suppliers will account for the VAT to HMRC in error and customers will recover it from HMRC.    

“Subcontractors will need to confirm that they are working for a VAT-registered business and whether they are working for an end-user, or for someone connected to an end-user, including landlords and tenants.”

The change, first announced in the Autumn Budget 2017, is part of a government clamp-down on VAT fraud. Large amounts of VAT are lost through ‘missing trader’ fraud when VAT is charged by a supplier, who then disappears, along with the output tax.

It is anticipated that the reverse charge removes scope to evade any VAT owing to HMRC. 

Supplies to an end-user will not be affected by the changes and VAT should be charged in the normal way. For ‘end-users’ it normally means customers who use building or construction services for themselves rather than sell the services on as part of their business.

The main points to be aware of are that only standard rated and reduced rated supplies are affected by the changes.

The reverse charge will only be applicable on ‘specified services’ that fall under the reporting requirements of the Construction Industry Scheme (CIS). The reverse charge only affects ‘specified supplies’ made between VAT registered businesses.

If making the supply to an ‘end-user’ then traders should account for VAT in the normal way.

Sub-contractors are likely to become VAT repayment traders.

Work on new build dwellings which is zero-rated will be unaffected. For work to be zero-rated for VAT, it must qualify as a genuinely new, self-contained house or flat which means:

• it’s self-contained - there are not any internal doors or connections to other houses or flats
• it can be used independently of any other property, including businesses
• it can be sold on its own
• it has proper planning permission
• any existing buildings on the site have been demolished completely to ground level (unless you’re extending an existing building to create a new house or flat)

Mr Laurie added: “After the reserve change comes into effect, HMRC has indicated it will apply a light touch when dealing with related errors for the first six months.

“However, we advise businesses to prepare for the changes now. This can be done by checking that your accounting package will deal with the domestic reverse charge.

“Start by putting procedures in place so you can identify supplies made to end-users and update invoices to make clear that the domestic reverse charge applies and that the customer is required to account for the VAT.

“It’s a good time to talk to your accountant, and you may want to consider the impact that the change may have on cash flow after October.”