It was announced on Friday 6 September 2019 that the implementation of the domestic reverse charge, which makes payment of the tax responsibility of the customer rather than the supplier, will now come into effect on 1 October 2020.
A statement from HMRC said that the change would be delayed because industry representatives had raised concerns that the sector was not ready for it.
A group of construction industry bodies wrote to the government warning of the problems it would cause companies last month, asking for a delay until April.
The change is part of anti-fraud rules aimed at targeting VAT-related fraud in supply chains within construction.
The statement from HMRC added that the body “remains committed to the introduction of the reverse charge and has already increased compliance resource”.
A UK customer who acquires supplies for construction services must account for VAT due on these materials on their VAT return rather than the supplier. In other words, the domestic reverse charge prevents fraudsters from stealing VAT owed to HMRC.
HMRC also underscores the need for businesses to adapt their accounting systems for dealing with VAT. Many of these will experience a negative impact on cash flow whilst no longer receiving VAT payments from customers for services where charges apply.
Brad Bamfield, our Finance and Management Director, is leading the PDSI Group Reverse VAT initiative and is attending various courses to ensure we are ready.
Brad said “I have read the HMRC guidance and its wording is not the clearest in the world. The definition of an End User is new and is key to the application of VAT through the supply chain.
My understanding is that domestic reverse charge will only affect supplies at the standard or reduced rates where payments are required to be reported through the CIS and that specified services are excluded, including professional services of architects, surveyors and certain consultants.”
Brad will provide more information here as he works through what is required and what we and our supply chain need to know and do.
However, we already know when the new rules do take effect, only principal contractors at the top of the supply chain will receive VAT payments, which they will collect from the client before paying it to HMRC.
More importantly monthly cashflow profiles for subcontractors will change, and all contractors will have to take on more administration, understanding who should and shouldn’t be charged VAT.