Last month I posted ‘A quick guide to the new VAT reverse charge for building and construction services’ which gave a brief overview of the upcoming change to the way VAT is collected on certain supplies in the building and construction industry.
The change is due to take effect from 1 October 2019 and with just a little over a month left to go, there are serious concerns surrounding the industry’s readiness.
By way of reminder, the new VAT domestic reserve charge will change the way in which VAT on construction supplies is accounted for. Rather than the supplier charging and accounting for VAT, the recipient of those supplies will be responsible. In practice, this would mean that instead of a sub-contractor charging VAT on their services and paying this to HMRC, the employer contractor will be responsible to self-account for VAT on the service. If VAT is charged incorrectly, it will be very difficult to recover.
The new rules are anticipated to create significant practical consequences and industry bodies are concerned that those affected are not sufficiently prepared for the costly administrative burden that will accompany the change. VAT accounting systems will need to be adapted and there will be further ongoing administrative costs to ensure compliance such as record keeping. Additionally, main contractors who are classified as the “end-user” will feel the effect as they will now be the one responsible for paying notable VAT bills and smaller sub-contractors will no longer be able to rely on VAT payments for cash flow.
Given the ramifications of the change, trade associations such as the Federation of Master Builders, the UK’s largest trade association in the building industry have called for the introduction date to be delayed after a recent survey revealed that 69% of construction SMEs surveyed had not even heard of the new reverse charge and are therefore not ready for the consequences.
The Chartered Institute of Taxation is another body concerned about the lack of preparedness and have also called on HMRC to delay the change by six months. The CIOT has said that an introduction date of 1 April 2020 would be more appropriate, allowing time for a dedicated information campaign to be operated by HMRC, with the assistance of industry and professional bodies. Although there was some technical guidance published by the Government on the 7 June, the CIOT say that this guidance does not provide the clarity that the industry needs and that there will be significant confusion among businesses in the early days of the change, should the implementation date not be delayed. The CIOT has highlighted the significant cash flow implications of the reverse charge and have pointed out that in a worst case scenario, the changes could lead to the insolvency of smaller sub-contractors. Further, the CIOT has stressed the importance that HMRC’s phone lines are adequately resourced to deal with the queries that will follow, considering that at the same time, HMRC will be having to deal with the implementation of Making Tax Digital, and the consequences of Brexit.
Given the widespread concern of the lack of awareness and preparedness in the industry for the new VAT reverse charge, those affected should be familiarising themselves with the new rules and seeking advice now to try and prevent business disruption. Should you wish to discuss the VAT reverse charge and how these changes might impact your business, please contact a member of our tax team.
Lauren Melnyk