While the whole country is having to get used to living with increasing amounts of confusion over the various COVID restrictions and come up with ever more inventive ways to run their businesses (if in fact they can run them at all), it looks like the construction industry is to be hit with yet another layer of confusion in the spring.
The VAT domestic reverse charge is about to be introduced in the UK for building and construction services. This next little treat for the construction industry was originally due to be introduced in October 2019 but, having been initially postponed until October 2020 so that the changes did not coincide with BREXIT and to give the sector more time to prepare, HMRC has now decided to delay its introduction until 1st March 2021.
The reverse charge is being introduced to help combat VAT fraud in the construction industry. It requires a VAT-registered business receiving the supply of construction services (that are reported under the Construction Industry Scheme) to pay VAT direct to HMRC rather than the supplier needing to account for VAT, as is currently the case. This change moves the VAT charge down the supply chain and helps prevent a construction business charging VAT and then disappearing without paying their VAT bill.
While for the tax payer it must be a good idea to try to close this loop hole that is often exploited by organised criminals (estimated to cost the UK Exchequer over £100m per year), the reverse charge will have a significant impact on how businesses within the sector account for VAT and manage their cash flows. They will need to make significant changes to their processes and systems in order to comply. Such changes could be particularly disruptive where a project straddles the implementation date. The current VAT rules will apply to invoices raised for services with a tax point before 1st March 2021 and the reverse charge will apply to invoices raised with a tax point on or after 1st March 2021.
In a time where the whole world is focused on the COVID pandemic, the introduction of a new VAT system could pass under the radar. So, while there are a number of exemptions when the reverse charge will not apply, it is important for construction businesses to determine when they will be required to account for VAT and to prepare the necessary changes to their accounting and invoicing systems now.
VAT reverse charge for construction: Delayed but not dropped