The legislation will require the recipient (rather than the supplier) to account for the VAT that is due on certain construction services, having a significant impact on accounting practises and business cash flow. It will only affect those payments that are required to be reported through the Construction Industry Scheme (CIS).
It should be noted that there will not be a transitional period, so you should be prepared for the legislation well in advance. Although HMRC recognise the difficulties in implementing the procedure and will take an initial light touch approach, you may still be liable for penalties for non-compliance.
It's most likely that this change is due to missing trader fraud, committed by sub-contractors who provide labour for construction services, which is most common in the building industry and costs HMRC more than £100m every year.
Therefore, by removing the ability to charge and collect VAT, there is no way to defraud the system. This concept is already in place for other items in the UK including mobile phones, and is active in many countries across the EU.
The Reverse Charge will apply to all CIS registered businesses buying and selling construction services that are subject to CIS reporting, apart from those that are zero rated, up to the point in the supply chain where the customer is the end user. At this point the normal reporting and collection of VAT resumes. Where the reverse charge applies, rather than the supplier charging and accounting for the VAT, the recipient of those supplies accounts for the VAT.
In practice, this will mean that where there is a chain of contractors/subcontractors working on a building project for example, none of those entities will add VAT to their invoices, other than the main contractor who is invoicing the end user of the property.
Guidance is available from HMRC about the VAT domestic reverse charge for building and construction services here.
Ultimately, the legislation is likely to mean adaptations are required in the way book-keeping systems are set up in order to be able to deal with this change.
If you want further information about how these changes will impact you and your business then please get in touch.