It’s not unusual for big changes announced by HMRC to be delayed or adjusted – particularly if there’s a significant backlash or confusion from those affected.
It may therefore come as little surprise to people working in the construction industry to hear that the domestic reverse charge VAT has been delayed until 1st October 2020.
What is the domestic reverse charge VAT?
Originally set to come into effect on 1st October 2019, the domestic reverse charge VAT is designed to put the onus on customers of construction services to pay the VAT element to HMRC, rather than the supplier.
It’ll apply to all VAT-registered firms and individuals in the UK who supply specific services listed under the construction industry scheme.
It’s a big change, which is why, before the U-turn, HMRC asked anyone affected to get their houses in order by checking if the new reverse charge would impact their operation. And that meant looking at the net result on sales, purchases and cash flow.
Clients would also need to be made aware of the new legislation, and, HMRC suggested, accounting systems possibly updated to handle the change.
Why is this so important to the construction industry?
The new rules are specifically targeted at the supply of services between construction businesses, in which there has been a steadily increasing amount of trader fraud.
Construction isn’t the only industry deemed appropriate for the reverse charge, either; similar legislation was applied to the sale of smartphone and computer chips some time ago.
To combat VAT fraud in construction, HMRC wants to put the onus of VAT on the buyer, thus removing an area of responsibility from the supplier which is unfortunately taken advantage of by some.
Someone needs to account for VAT, and while the reverse charge represents a significant accounting change for the businesses involved, its reasons for existing are to protect the wider construction industry and the legitimate businesses within. It should also be noted that the reverse charged services won’t count towards the VAT registration threshold, which is good news for small businesses.
Why the delay?
When the reverse charge was announced, HMRC issued a consultation on the draft details of the new rules. This led to a campaign which indicated that 150,000 businesses in the construction sector weren’t ready for the new reverse charge.
Brexit also played a role, thanks to the UK’s exit from the EU potentially clashing with the introduction of the reverse charge VAT. As a result, and to help businesses prepare for the changes, HMRC has decided to put it on hold for twelve months.
The Chartered Institute of Taxation (CIOT) has welcomed the news, having previously warned that the introduction of the measures this year could cause widespread disruption in the construction sector. A survey by the Federation of Master Builders appeared to confirm this, with a 69% majority of SMEs suggesting they hadn’t heard of reverse charge VAT.
Is this good or bad news?
A start date of October 2020 for the new legislation is far more sensible, and should allow time for those affected to identify any potential impacts on cashflow. Equally, it gives suppliers the time that was sorely lacking before to inform their customers of the change.
Despite this, we understand there might still be a lot of confusion and concern over the changes, and if you have some questions of your own, we’d love to help.
Please do not hesitate to get in touch with our team to discuss the reverse VAT charge and how it might impact your construction business in future.