24/07/2020 by Andrew Brealey, Brealey + Newbury Accountants 0 Comments
Reverse charge VAT delayed until 2021
An overhaul of VAT in the construction industry has been pushed back to 2021 due to the impact of the coronavirus pandemic.
Reverse charge VAT, which would put an end to subcontractors receiving VAT payments in most situations, will now be introduced on 1 March 2021. This pushes the scheme back five months from the previous start date of 1 October 2020. It is the second time the new regime has been delayed, having initially been scheduled to come into force last October. The government said the decision to delay had been taken to help “businesses overcome the effects that the coronavirus pandemic has had on them”.
What is the reverse charge?
The reverse charge sees the customer who gets supplies of construction services responsible for the VAT due on these supplies on their VAT return instead of the supplier.
It applies exclusively to transactions between VAT registered contractors and subcontractors who are registered for the Construction Industry Scheme (CIS). It applies to both standard and reduced-rate VAT supplies but not to zero-rated supplies.
There are numerous exemptions, including the manufacture of components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection and the installation of seating, blinds and shutters, as well as the installation of security systems, including burglar alarms, closed circuit television and public address systems.
If any non-reverse charge supplies are supplied with supplies that are subject to the domestic reverse charge, then the whole supply is then subject to the domestic reverse charge.
Why introduce a reverse VAT charge?
In 2018, the government stated that the VAT reverse charge 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”.
Apparently, VAT fraud in construction sector labour supply chains has been a real problem, with criminals fraudulently taking over or creating shell companies to steal VAT while operating alongside actual construction services. This ‘missing trader’ fraud is thought to be costing the taxpayer tens of millions of pounds a year.
The reverse charge is forecast to save the taxpayer £90m of lost revenue during its first year of operation alone.
What does this mean in practice?
Approximately 150,000 affected businesses will have to change their systems for dealing with VAT. For many, there will be a negative impact on cash-flow because they will no longer receive VAT payments.
In recent months, various organisations have highlighted that most affected businesses did not know about the change and those that did often did not understand exactly what was required of them or how to go about implementing change.
Federation of Master Builders (FMB) chief executive Brian Berry called the delay a “victory for common sense”. He said: “The coronavirus pandemic has had significant impacts on cashflow for small to medium-sized (SME) construction firms. While the industry called for a delay of one year, five months’ breathing space will go some way to helping them recover.”
Pro Steel Engineering director and co-founder Richard Selby said he was "extremely relieved" at the decision. He added: "We have enough challenges at the moment with ensuring staff and families are healthy and safe without having to introduce a whole new financial system to meet these new requirements. I only ask that it is reviewed again soon and at least postponed until October 2021 at the earliest or even better reconsidered completely.”
The government has also taken the opportunity to amend the system and will now require firms that are end-users of goods and services to notify suppliers and subcontractors of their status. HMRC said the change will ensure subcontractors are clear on how to treat VAT payments and charges.
The change is expected to have a short-term impact on cashflow as subcontractors will no longer receive VAT payments from customers.