VAT changes for the construction industry delayed

The government has delayed the implementation of VAT changes for the construction industry for a second time to help businesses overcome the effects of the coronavirus pandemic.

HMRC has announced that the domestic reverse charge for construction services will be delayed for five months until March 1 next year.

It is the second postponement of the changes, which were originally planned for last October and then put back 12 months.

That initial delay was in response to industry concerns that some businesses were not ready to implement the changes required.

The domestic reverse charge means the UK customer who gets supplies of construction services must account for the VAT due on these supplies on their VAT return, rather than the UK supplier.

Businesses will need to adapt their accounting systems for dealing with VAT and there will be a negative impact on the cash-flows for many of those affected, as they will no longer get VAT payments from customers for services where the reverse charge applies.

The taxman says the change will remove “the scope for fraudsters to steal the VAT due” and follows similar measures introduced in response to criminal threats for mobile telephones, computer chips, emissions allowances, gas and electricity, telecommunication services and renewable energy certificates.

HMRC has also announced an amendment to the original legislation. It will require end users and intermediary suppliers to notify their sub-contractors of their end user or intermediary supplier status in writing.

It says the amendment is designed to make sure both parties are clear whether the supply is excluded from the reverse charge.

The changes only apply to supplies of building or construction services made to or received by businesses registered for UK VAT, where such a supply must be reported through the Construction Industry Scheme (CIS). It will not apply to consumers or businesses customers not meeting the reporting criteria.

HMRC says it “remains committed to the introduction of the reverse charge and has put in place a robust compliance strategy for tackling fraud in the construction sector using tried and tested compliance tools.”

In a statement announcing the delay, it said: “In the intervening period, HMRC will continue to 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.”

This latest delay to the changes will also give businesses more time to adapt their accounts systems to account for the new rules.

The move has been welcomed by The Chartered Institute of Taxation (CIOT). It says that without the delay there was a risk of this major tax change hitting SMEs the hardest at a time when they need to protect jobs and livelihoods.

Linda Skilbeck, vice chair of the CIOT’s Indirect Taxes Committee, said: “We welcome the further delay to the implementation of the domestic reverse charge for construction services to March 1 2021 because of the many unexpected pressures caused by the pandemic and the lockdown on construction businesses, of which a significant proportion are SMEs.

“The cash flow effect of the domestic reverse charge will be significant, and this is compounded by the added effect of reduced business activity due to Covid-19 restrictions.

“The change to the legislation to clarify the position as to when the reverse charge applies should also lessen the chance of disputes between suppliers and customers as to which party in the supply chain should be accounting for VAT.

“We hope HMRC will work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses are ready for the new implementation date.”