What Does The VAT Reverse Charge Delay Mean For Construction?

The government settled the domestic VAT reverse charge for building and construction services back in September this year, but it is said to have been delayed by a year and won’t go ahead until 1st October 2020. In this post, we will discuss what compromises the VAT reverse charge, the reasons for the delay and how the charge will affect construction firms now and in the future.

What Is The VAT Reverse Charge?

The VAT reverse charge is based on the amount of value-added tax you would have spent on a service if it was bought in the UK. It involves you adding the amount you would have paid to the total VAT you are going to pay to Her Majesty’s Revenue and Customs (HMRC) that quarter, but you will also add the amount of VAT you are going to reclaim in that quarter. Therefore, it means you won’t be paying anything extra to HMRC or be reclaiming anything extra from them.

Originally, the supplier was the individual accountable for the value-added tax due on the supplies on their VAT return, but according to the new domestic reverse charge going ahead in October 2020, it is now the customer that purchases the supplies from the construction service that is responsible for the value-added tax.

The VAT reverse charge currently applies to any purchase between VAT contractors and sub-contractors that are enrolled for the Construction Industry Scheme (CIS). The CIS is the process by HMRC where income tax is collected from individuals working in and around the construction industry. This process refers to the workers as subcontractors rather than employees. It applies to standard and reduced-rate VAT supplies but is not applicable to zero-rated supplies.

However, the VAT reverse charge exempts a large number of construction types such as the manufacturing of systems for heating, lighting, power supply, water supply, ventilation, air conditioning and various other operations. The reverse charge also exempts the installation of a variety of security systems.

Why Is The Domestic Reverse Charge Being Put In Place?

In 2018, the government informed businesses of their reasoning for the VAT reverse charge. They stated that it is “an anti-fraud measure which removes the opportunity for fraudsters to charge VAT and then go missing, before paying it over to the Exchequer”. They expressed the fact that value-added tax in the construction industry supply chains has been a common problem.

It was said that a number of criminals were committing an act of fraud by taking over or creating shell companies to steal VAT while running alongside genuine construction services. Therefore, it was thought to be costing the taxpayer millions of pounds a year. In fact, The VAT reverse charge is anticipated to save the taxpayer as much as £90m of lost revenue during its first year alone.

What Are The Effects?

One of the biggest effects of the domestic reverse charge is that over 150,000 construction firms will have to alter their VAT systems, creating an adverse effect on the business’ cash-flow as they will no longer receive these value-added tax payments.

Phil Hall, Head of Public Affairs and Public Policy at The Association of Accounting Technicians, has researched into what the reverse charge means for construction firms. He found that a number of different organisations have stated that the businesses that have struggled the most with the aftermath of the change are the ones that weren’t aware of it and what was required.

Why Has The Reverse Charge Been Delayed?

Furthermore, that signifies the justification for why the delay has been put in place; the fact that firms have received little awareness and notice for the VAT charge. There was even a report published in 2018 which provided guidance on the matter but it seemed to have left a number of questions with pending answers. Not realising how crucial it was to transfer VAT responsibility from suppliers onto customers meant that individuals weren’t prepared to accept such a big change to the system.

Therefore, to ensure long-term success, the government felt like the safest option was to delay the reverse charge for another 12 months so firms can familiarise themselves with the concept. After previous criticism towards the government for being senseless and abrupt with decisions, it’s believed that they’ll be praised by many for this decision.

What Does The Delay Mean For Our Future?

Contravening the advocacy for the government, one of the main complications of the VAT reverse charge is that many businesses have already implemented the reversal into their invoicing, only to find out it has been delayed so far down the line.

However, HMRC has accepted the early implementations and has said they will be receptive to any of the implications that may have been caused. HMRC has also certified that they will: “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”.

Another way businesses can receive information on the VAT reverse charge is through professional bodies in the accountancy sector and the construction industry who must initiate awareness campaigns for their members. For example, The Association of Accounting Techniques (AAT), is holding a diverse range of events around the country on the matter, providing news updates and information via member discussion forums.

Therefore, this expresses the importance of construction firms seeking knowledge and support on the matter before it comes into practice next year, so no one is in the same position as this year.

Do You Need More Guidance on The VAT Reverse Charge?

At Stonehouse Accountants, we understand the effects of the VAT reverse charge and how the delay may have caused complications to your business’ invoicing. We can work with you to educate and prepare your business on the reverse charge being implemented in October 2020.

If you would like to find out more about our team, or how we can support you and give you advice on what to do next, give us a call on 01733 265888.