The government is currently under a lot of heat from all directions and the complicated landscape around Brexit is causing issues in legislative proposals as well. Now, the looming Brexit deadline together with mounting industry pressure has led to a delay in the introduction of the reverse charge VAT for builders. The change to the VAT law was supposed to come into effect on 1 October 2019 but the government has now pulled the plug. However, the change in direction is set to be just a pause. The government still plans to introduce the changes and it hopes the sector will be more prepared once the changes finally kick in.
What has the government said about the delay?
A few days ago, the government published a short briefing stating that it would be putting the introduction of the domestic reverse charge for construction services on ice. According to the briefing, the delay would last for 12 months, with the policy intended to become law on 1 October 2020.
The government explained the delay to be down to industry concerns, with the move intended to “give them more time to prepare”. Furthermore, the delay will also avoid the industry having to deal with the reverse charge VAT at the same time Brexit is supposed to happen. This could have been problematic for many businesses, as it looks like the country could depart from the European Union without a deal in place.
The construction industry welcomed the delay. AccountingWEB quoted Chief Executive of the Federation of Master Builders, Brian Berry, stating how the move was “sensible and pragmatic”. Berry also went on to say how the implementation of the change “could have been disastrous given that the changes were due to be made just before the UK is expected to leave the EU”. In this instance, it looks like the government paid close attention to the industry.
What is the reverse charge VAT for builders about?
The reverse charge VAT for builders has been planned for years now. It was designed to tackle fraud and theft in the construction building sector and for the industry to be able to respond to modern technology. The legislation limits the scope for fraudsters to steal VAT intended for HMRC because it means the liability for VAT changes.
In a nutshell, a domestic reverse charge means that any UK customer getting supplies of construction services is liable to account for the VAT on those supplies on their VAT return. Traditionally, it has been the responsibility of the UK supplier for those supplies. The change will only affect business-to-business supplies of goods or services where the recipient makes an onward supply of goods or services provided to them. An easy way of knowing whether the reverse charge applies is to consider whether a purchase is for onward sale or whether the goods or services are going to the end-user or customer.
It’s important to note that certain services will be excluded from the change. This includes:
- Zero-rated supplies.
- Services provided to the end-user, i.e. the property owner, or those supplied to the main contractor who sells the building to a customer.
- Recipients who make onward supplies of construction via connected companies.
- Situations where supplier and recipient are in a landlord/tenant relationship.
If you’d like to read more about the changes, you should check out our previous blog post where we introduced the law in detail.
For businesses, this would mean big changes in an administrative sense but also in terms of cash-flow. In terms of the administrative challenges, both accounting systems and invoices will have to reflect the new VAT reverse charge. While this can take a lot of time to sort out, it’s the impact on cash-flow that many in the construction sector are concerned about. Because businesses won’t get VAT payments from customers for services where the new reverse charge applies, they could face severe declines in cash-flow.
What will happen next?
Although the industry is given a bit more breathing room in terms of the implementation of the policy, the reverse charge VAT for builders is set to go ahead at a later point. As the government’s briefing made clear, the policy is on the road to becoming law in October 2020. So businesses cannot forget about the law and its possible impact on their operations.
The good news is that HMRC has said it’s committed to continuing working with the sector to boost awareness of the change. It also aims to provide additional guidance on how to prepare and, ultimately, implement the changes.
Furthermore, because the original implementation date was just a few weeks away, HMRC is prepared to show leniency in any errors that might occur in tax filing. Some businesses might have already changed their invoices to reflect the reverse charge VAT which might result in problems now that the changes won’t go ahead. HMRC has promised to consider this in the case of genuine errors.
How to get help with your taxes
Navigating the ever-changing tax landscape can be tricky for a construction business. If you need further information regarding the delay or advice on how to prepare for the reverse charge VAT for builders, a professional tax advisor and accountant can help you. We at Devonshire Green can help you understand the complexities of small business taxation and the best ways for construction businesses to prepare for the changing world of taxation.
Contact us today to talk more about the current rules – together we can ensure your construction business is prepared for future changes!