The domestic reverse charge VAT for construction services was due to take effect from 1 October 2019.
Just a few weeks before the measure was due to come into force however, the government has announced a 12-month delay to its introduction. This means that reverse charge VAT for the building and construction industry won’t come into effect until 1 October 2020.
What does the reverse charge mean?
The reverse VAT charge will put the onus on the customer receiving a service to pay the VAT element to HMRC, instead of paying the supplier. This is being done in a bid to combat missing trader fraud in the construction sector.
The measure will apply to VAT-registered individuals or firms in the UK who supply specific services under the construction industry scheme.
Campaigners have however expressed concerns that up to 150,000 businesses in the sector weren’t ready for the changes to be implemented next month. They also cited research which suggests that the charge could lead to a spike in the number of company insolvencies as well as construction chaos.
To help those businesses prepare, and to avoid the measure clashing with the UK’s scheduled exit from the EU, the reverse change has been put on hold for 12 months.
The Chartered Institute of Taxation (CIOT) welcomed the news, after months of calling for it to be delayed.
It warned that implementing the measure next month may cause widespread disruption to the construction sector.
That suspicion was fuelled by a survey from the Federation of Master Builders, which found that 69% of SMEs in the construction sector hadn’t even heard of reverse charge VAT.
Linda Skilbeck, vice-chair of the CIOT’s indirect taxes sub-committee commented:
“A start date of October 2020 is more sensible. This should allow time for a dedicated information campaign to be operated by HMRC, with the assistance of industry and professional bodies.”
Prior to the 11th-hour U-turn, HMRC had urged those set to be affected by the change to get their houses in order by checking whether the reverse charge will affect sales, purchases or both, and telling clients or suppliers of the measure.
It has also stated that it remains committed to introducing the charges and will focus additional resources on identifying and tackling existing perpetrators of VAT-related fraud in the industry over the next year.
HMRC also advised those affected to update their accounting systems to handle the change, and consider cashflow impacts.
What if I’ve already prepared for the reverse charge?
HMRC has recognised 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, the tax authority has stated that it will take into account the late change in its implementation date.
“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.”
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