Construction VAT changes are delayed

Major changes to the way VAT is collected in the construction industry have been delayed until October 1 next year.

It follows growing concerns that some businesses were not ready to implement the VAT ‘domestic reverse charge’ for building and construction which was set to come into force at the start of next month.

The delay aims to give businesses more time to prepare and also avoid the changes coinciding with an October Brexit, if that takes place.

In a briefing note, HM Revenue & Customs, said: “HMRC remains committed to the introduction of the reverse charge and has already increased compliance resource.

“It has put in place a robust compliance strategy for tackling fraud in the construction sector using tried and tested compliance tools.

“In the intervening year, HMRC will focus additional resource on identifying and tackling existing perpetrators of the fraud. It will also work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses will be ready for the new implementation date.

“HRMC recognises that some businesses will have already changed their invoices to meet the needs of the reverse charge and cannot easily change them back in time. Where genuine errors have occurred, HMRC will take into account the fact that the implementation date has changed.

“Some businesses may have opted for monthly VAT returns ahead of the 1 October 2019 implementation date which they can reverse by using the appropriate stagger option on the HMRC website.”

The construction industry will be relieved by the delay to the changes, which were likely to have a big impact on SMEs in the sector.

It has been estimated that the new domestic reverse charge rules could affect up to 150,000 businesses in the construction and building trade in the UK.

There have been fears that the change could hit the cash flow of sub-contractors in an industry already feeling the squeeze when it comes to payments.

However, it is important to stress this is just a delay and not a cancellation of the scheme.

Some businesses use the VAT they collect from customers as working capital before they pay it over to the HMRC. And they will need to prepare for potential cash flow problems when the new rules come into effect.

It makes it really important that businesses look closely at their supply chain and their customers now and determine how the change will affect them, and what they can do to minimise any impact and get prepared for the implementation.

The reverse charge will apply throughout the supply chain where payments are required to be reported through the Construction Industry Scheme (CIS).

It is expected that supplies between sub-contractors and main contractors will be most affected by the change. At present a sub-contractor is responsible for charging and accounting for VAT to the taxman on supplies to main contractors.

Under the new reverse charge rules the main contractor will be responsible for declaring the VAT on supplies received from the sub-contractor.

An equivalent VAT deduction can also be claimed by the main contractor subject to the normal rules of VAT recovery.

The new rules will apply only to certain building and construction services and to charges in the supply chain – not to end users.

What it does mean is that VAT cash will no longer flow between businesses. For every transaction, the VAT will be registered and clearly stated on the invoice as a reverse charge.

Businesses which receive services from another contractor will need to determine which VAT rate applies and whether the services received will be subject to the charge.

To discuss how the construction industry domestic reverse charge for VAT could affect your business, or to talk about any aspect of VAT, please contact me on 01772 430000.