A customer within the construction industry receiving the supply of construction services will have to pay the VAT direct to HM Revenue & Customs (HMRC) rather than paying it to the supplier. Supplies made to 'end users', supplies between connected parties and supplies between landlords and tenants will all be excluded from the new rules.

The reverse charge will have a significant impact on how businesses within the sector account for VAT and manage their cash flows. Significant process and systems changes will be required. Planning will need to commence well in advance of the implementation deadline of 1 October 2019.

The reverse charge mechanism shifts the liability for accounting for output VAT from the supplier to the customer. This prevents the supplier from charging what purports to be VAT to the customer, but then absconding with the VAT element and not paying it over to HMRC.

The domestic reverse charge will only affect supplies at the standard or reduced rates where payments are required to be reported through the CIS.

This will have a significant impact on VAT compliance and cash flow management for the businesses involved. New systems and processes will need to be introduced or current systems and processes will need to be amended in order for businesses to be able to implement the new rules as of 1 October 2019.

Smaller sub-contractors may currently rely on the positive cashflow in respect of the VAT element of contract payments which will disappear in relation to reverse charge supplies.

HMRC recognises the difficulties around implementing the new rules and has announced that it will apply a light touch in dealing with related errors that occur in the first six months after introduction.

Full details can be found at the HMRC website.