THE VAT Reverse Charge scheme for construction companies, due to be introduced from 1 October 2019, will now be postponed for a year, until 1 October 2020, HMRC has announced.
The decision follows an industry outcry, with some companies set to lose out on up to a quarter’s VAT and others confused about the scheme and unprepared for the new arrangements.
The scheme meant that those supplying construction services to a CIS-registered customer would have no longer had to pay the VAT themselves. Instead, the customer would account for and pay the VAT to HMRC.
For roofing subcontractors supplying services, it would be the client/contractor employing them that would handle and pay the VAT directly to HMRC. Subcontractors would show VAT in their invoice to their customer, but it was the customer who would make the payment to HMRC. The payment the sub-contractor received would be for the cost of the work done (plus materials used) only.
The scheme was set to be introduced in October in an effort to reduce fraud by subcontractors not paying on to HMRC the VAT they had charged.
VAT Reverse Charge criticised
Plans for the scheme were criticised, with industry claiming the absence of VAT payments on invoices would disrupt many construction companies’ cashflow. Other objections were that HMRC had left too little time for companies to prepare before the 1 October deadline.
HMRC argues that there has been a long lead-in time for the scheme, with its introduction first confirmed in the Autumn Budget 2017 and the final rules published in November 2018. However, the government acknowledges “Businesses need to adapt their accounting systems for dealing with VAT and there will be a negative impact on the cash-flows for many affected businesses”.
Welcoming the postponement decision, Richard Beresford, chief executive of the NFB, said: “Contractors and sub-contractors weren’t ready for reverse charge VAT and we are delighted that the Government has listened to our industry campaign to seek a delay.”
“The Government has given us double the time we recommended and this will help us work together to set up improved online guidance, hold workshops and make sure the entire industry understands what reverse VAT charge means for their business.”
Ready for new VAT date
HMRC says it will now raise awareness and provide additional guidance and support to make sure all businesses will be ready for the new implementation date.
HRMC says it recognises that some businesses will have already changed their invoices for the reverse charge and cannot easily change them back in time. It adds, “where genuine errors have occurred, HMRC will take into account the fact that the implementation date has changed.”
HMRC will update the reverse charge guidance to reflect the change in the implementation date.
Alison Horner, Indirect Tax Partner at MHA MacIntyre Hudson, says while the 12-month delay to the introduction of the VAT domestic reverse charge for the construction sector is a welcome relief, it’s very frustrating for the businesses which spent time and money to properly prepare.
“For the whole industry, the delay will be a relief. Over the last 6-12 months businesses have been spending time and money to ensure they are ready for the changes. There was a serious concern that many sub-contractors would go out of business as a result of the new rules.
“The introduction of Making Tax Digital and the threat of Brexit at the end of October or soon after seem to have convinced HMRC it was too much to expect a key industry sector to implement such significant changes at this time.
“For those who invested the time and money to be ready, it will be frustrating and it will have been costly, but they will be prepared when the charge is introduced next October. The worst affected will be those sub-contractors who moved to monthly returns to get ahead of the changes. These sub-contractors will need to reverse their VAT return accounting dates as soon as possible, which HMRC have said they will facilitate. By remaining on monthly returns sub-contractors may find they have cash flow problems in funding an unexpected VAT payment to HMRC. They are the only ones who need to take immediate action. The rest can breathe a sigh of relief.”