A change to the VAT rules first announced at Budget 2018 will come into effect from 1 October 2019. This change will make the supply of construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector.

This move is part of the government’s measures to combat what is known as missing trader fraud in the construction sector, where VAT due to HMRC is never paid by the subcontractor. This type of fraud has been common in other business sectors such as cross-border trading in mobile telephones, computer chips and emissions allowances.

Using the reverse charge procedure changes the usual VAT treatment so that the customer is liable to account for the VAT due rather than the supplier. This will place the onus for dealing with the VAT charge due on subcontractors’ bills to the main contractor.

The new reverse charge will be most relevant to sub-contractors and contractors carrying out supplies reported through the Construction Industry Scheme. These changes will lead to administrative changes for some 100,000 to 150,000 businesses in this sector, including many small businesses.

Adopting accounting systems to cope with this change will cause accounting rather than cash flow issues for main contractors as they will add entries to their VAT returns to refect the subcontractors’ VAT, but then deduct the equivalent amount as input VAT on the same return.

There are less than 12 months until the new rules come into effect and businesses that will be impacted, need to begin making any necessary preparations.

The Chancellor confirmed in his Budget speech that the taxable turnover threshold that determines whether businesses should be registered for VAT, will be frozen at £85,000 for a further 2 years from 1 April 2020 until 31 March 2022. The taxable turnover threshold that determines whether businesses can apply for deregistration will also be frozen at the current rate of £83,000 for the same time period.

Businesses are required to register for VAT if they meet either of the following two conditions:

1. At the end of any month, the value of the taxable supplies made in the past 12 months or less has exceeded £85,000; or
2. At any time, there are reasonable grounds for believing that the value of taxable supplies to be made in the next 30 days alone will exceed £85,000.

The Chancellor was clear that the government had explored various options to address the cliff edge effect of VAT registration. This followed the publication of an Office of Tax Simplification report recognising the distortions the threshold causes and recommending the government review this area of tax. The ability to allow small businesses to stay outside the VAT system has many benefits, but there are concerns of the gap between businesses that have to charge VAT against those that do not. HM Treasury will continue to examine this issue, but the Chancellor has provided certainty for the time being on the VAT thresholds for the next number of years.

The introduction of Making Tax Digital (MTD) for VAT is fast approaching. From April 2019, some 1 million businesses with a turnover above the VAT threshold (currently £85,000) will have to keep their records digitally (for VAT purposes only) and provide their VAT return information to HMRC through MTD compatible software.

An initial private beta pilot of MTD for VAT was launched in April this year. HMRC has now confirmed in a press release that the pilot has been extended to businesses whose affairs are up to date and will extend to most other business types over the coming months.

HMRC has also listened to concerns and will give a small group of customers with more complex requirements a further 6 months to prepare. This will ensure there is sufficient time for testing the service in the pilot scheme before they are required to join.

Mel Stride MP, Financial Secretary to the Treasury, said:

‘HMRC is transforming the tax administration so that it’s more effective, more efficient and easier for taxpayers. Today’s announcement means that around half a million businesses will be able to join Making Tax Digital and start filing their VAT returns online, making it easier to get their tax right first time.’

Currently, businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020.

There are special VAT rules that allow businesses to standard rate the supply of most non-residential and commercial land and buildings (known as the option to tax). This means that subsequent supplies by the person making the option to tax will be subject to VAT at the standard rate.

The ability to convert the treatment of VAT exempt land and buildings to taxable can have many benefits. The main benefit is that the person making the option to tax will be able to recover VAT on costs (subject to the usual rules) associated with the property including the purchase and refurbishment of the property.

However, any subsequent sale or rental of the property will attract VAT. Where the purchaser or tenant is able recover the VAT charged this is not normally an issue. However, where the purchaser / tenant is not VAT registered or not fully taxable (such as bank) the VAT can become an additional (non-recoverable) cost. Once an option to tax has been made it can only be revoked under limited circumstances, for example:

• within a 6 month ‘cooling off’ period,
• an automatic revocation where no interest has been held for more than 6 years and after 20 years has elapsed.

There are strict rules and conditions which must be met for all these revocations.

Proper consideration of the various issues is important prior to making an election.

The deadline for businesses with a turnover above the VAT threshold to keep digital records and provide regular digital updates to HMRC for VAT purposes using Making Tax Digital (MTD) is fast approaching. From 1 April 2019, businesses with a turnover above the VAT threshold (currently £85,000) will be required to keep their records digitally (initially for VAT purposes only).

For VAT accounting periods starting on or after 1 April 2019, businesses will need to provide their VAT return information directly to HMRC using MTD-compatible software. The deadlines for sending VAT returns and making payments are not changing. It is important that businesses are aware of these changes and are preparing for the approaching deadline.

HMRC has been working with a growing number of software suppliers to ensure that their software supports MTD for VAT. HMRC launched an initial beta pilot of Making Tax Digital for VAT in April 2018 and the pilot is expected to be widened later this year with more businesses being invited to join.

Following concerns, HMRC has agreed to give businesses until 31 March 2020 to make sure there are digital links between software products. During the first year of MTD for VAT, businesses who use more than one software programme to keep their VAT records and prepare and file returns will not be required to have digital links between those software programmes.

This means that cutting and pasting may be an allowable way to transfer information during the first year of MTD for VAT. This most commonly relates to use of a spreadsheet for calculating the final figures to enter onto a VAT return. In the future, bridging or MTD-compatible software will be required so the information can be digitally sent to HMRC with no manual intervention.