VAT and the reverse charge – tough times in the construction sector

Those involved in property contracting may be grimly aware of some important VAT changes due to be introduced with effect from 1st October of this year. However, it seems many are still blissfully unsuspecting of the changes about to hit.

A recent survey indicates that 69% of SMEs have not heard of the VAT proposal to introduce a “domestic reverse charge” for payment of VAT by contractors, so many are still unaware of the changes. *

This is to be forgiven: HMRC only published a guidance document on 7th June. This should have been published at least six months ahead of the change. Equally, this document is heavy reading for anyone that does not consider themselves expert in VAT and construction. There has been no Revenue & Customs Brief or Public Notice.

New responsibilities

This is not the place to go into the details of the new legislation other than to say that the intention is that each supplier in the construction chain will no longer charge and collect VAT from their customer. It will be the customer that accounts for the VAT due under what is referred to as the “domestic reverse charge”.

Only invoices issued to the “end user” - the developer - will continue to be raised in the normal way. This is a massive over simplification of some very complex legislation and it is important that the detail is carefully studied.

The intention is to cut back on fraud in the construction chain by removing large amounts of VAT being paid and recovered through the system, although, ironically, late in the day labour services supplied by employment business were removed from the rule changes, and this has always been seen to be one of the main problem areas.

Key considerations

Here are a few practical points that contractors needing to operate the reverse charge should consider:

1. Cash flow – While contractors will no longer have to pay VAT to other contractors below them in the contracting chain, neither will they be charging and collecting VAT from the contractors that employ them. Many contractors use the VAT received as working capital until the VAT is due to be paid to HMRC some months later. This change will have a major impact on cash flow for many contractors, and in some cases will no doubt create liquidity problems, the effects of which may be felt all the way up the supply chain.
2. IT software – At a time when businesses will be grappling with Brexit and Making Tax Digital, accounts packages will need to be able to deal with reverse charge accounting in order to submit correct VAT returns. Furthermore, accounts staff will need training to recognise when reverse charge accounting is necessary. All this costs time and money.
3. “End user” – the end user will need to advise the supplier of their status to ensure VAT is charged in the normal way. Many end users will be unaware of this requirement which may result in the contractor issuing an invoice without VAT on the assumption that the customer will account for VAT under the reverse charge. There is a danger in this case that VAT will not be accounted for by any party, not because of any fraudulent intent, but simply because the parties are unaware of the requirements. In this case HMRC have indicated they may look to the end user to recover any VAT due. Furthermore, contract terms may need to be amended to cater for these changes.

The above represent just a handful of the problems likely to arise with the introduction of the new domestic reverse charge. However, in spite of calls to delay the change until April 2020, it seems certain that HMRC will press ahead with the new legislation. There are certain to be a number of implementation issues. Businesses need to consider what action to take now.

* Survey conducted by Federation of Master Builders | July 2019

If you would like to discuss the new reverse charge and how it will impact you, please contact us.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.