VAT reverse charge for construction services delayed until October 2020

The VAT reverse charge was originally set to be introduced on 1 October 2019; a regime that will see many VAT-registered construction businesses change the way in which they account for VAT, on some of their supplies.

Businesses that are caught by the reverse charge VAT will no longer charge VAT on their services. Instead, the recipient will charge themselves VAT.

Rewind a couple of months and those within the scope of the rules would have been in the throws of trying to understand the impact that these changes would have, and how best they could prepare ahead of implementation.

Now though, the picture looks a little different as HMRC announced a 12-month postponement on Friday 6 September. Much of the detail remains the same, except that the date of implementation will be 1 October 2020.

The delay comes in response to concerns expressed by industry representatives; that some businesses in the construction sector would not be properly equipped to comply with the new rules so soon.

By deferring the introduction of the VAT reverse charge for a period of 12 months, until 1 October 2020, it is intended that businesses will have more time to prepare and that any clash with an October 2019 Brexit will also be side-stepped.

In HMRC’s briefing note, it states that it “remains committed to the introduction of the reverse charge and has already increased compliance resource” to tackle fraud in the construction sector.

Between now and the new implementation date, HMRC will focus additional resource on identifying and challenging existing perpetrators of the fraud.

It has also confirmed that it will work closely with the construction sector to raise awareness, and to provide additional guidance and support, in an attempt to ensure that all businesses will be ready in good time.

With the announcement being published less than a month before the rules were originally intended to take effect, there will undoubtedly be some ‘fall-out’.

It is likely that many businesses will have already made changes to their invoices, in order to fulfil the requirements. Where this is the case, HMRC has confirmed that the change in implementation date will be taken into account when genuine errors are identified.

HMRC also recognises that affected businesses may have opted for monthly VAT returns in response to the new rules; something it says can be reversed by using the appropriate stagger option on its website.

Given that the construction sector has been granted this ‘stay of execution’, it’s important that those within scope of the changes use the next 12 months wisely and undertake the necessary preparations.

George Hay’s Tax Partner, Barry Jefferd commented “Whilst many larger contractors have been made aware of the reverse charge for CIS, the message doesn’t seem to have filtered down to their sub-contractors, nor their ledger clerks who ultimately will be responsible for checking that the supply chain are complying.”

Construction businesses will need to ensure that their accounting systems are capable of processing reverse charge supplies and regular checks must be carried out, to confirm that supplies and purchases are being correctly treated.

Partner and property and construction expert at George Hay, Toni Hunter said “Bookkeeping software providers have given assurance that they were ready for the change, but this hadn’t been put to the test and some have still not published any guidance for the users of their software to follow.  So, overall, this deferment does give opportunity for better communication and preparation.”

For subcontractors, it is highly likely that the new rules will impact upon their monthly cashflow profiles so should consider registering for monthly VAT submissions, and it is fair to say that all contractors will have to take on more administration, as a result of the need to identify who should and shouldn’t be charged VAT.

Put simply, subcontractors and main contractors will have their own unique responsibilities to observe under the new rules; these should be taken seriously as HMRC could raise an assessment where it deems that VAT has been paid incorrectly.

How can George Hay help?

If you are concerned about how the delay to the changes will impact upon you, or if you would like more information about how you can begin to prepare ahead of 1 October 2020, contact our team of property, construction and tax experts today.

Find out more about what the VAT reverse charge means for the construction industry and, more importantly, your business in our handy summary; ‘A Guide to The VAT Reverse Charge for the Construction Sector’

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