Government postpones VAT reverse charge

The Government has confirmed it will put on hold plans to introduce reverse charge VAT in the construction industry for another 12 months.

This follows concerns raised by accountancy bodies and the industry regarding insufficient time to plan and implement the changes.

The reverse charge affects VAT registered businesses in the construction sector, in particular those who report via the Construction Industry Scheme (CIS). Once implemented, UK-based customers who receive certain construction services must account for the VAT to HM Revenue and Customs (HMRC), instead of the supplier.

HMRC says this approach should be seen as an “anti-fraud” measure, preventing fraudsters from stealing VAT owed to HMRC.

However, many of the 150,000 businesses affected are yet to update their accounting systems to abide by the new VAT regime. Meanwhile many businesses in the construction sector will be affected by reduced cashflow due to an end to VAT payments from customers where the reverse charge is applicable.

A recent survey undertaken by the Federation of Master Builders (FMB) in July found that more than two-thirds (69%) of SME construction firms were wholly unaware of the VAT reverse charge proposals

Meanwhile 67% of those small construction firms that were aware of the proposals weren’t prepared for the changes, with the FMB warning the Government of probable “chaos” if the new regime was to come into effect on 1st October 2019.

The Government has heeded those concerns and issued a policy brief confirming that the implementation of the new VAT reverse charge regime will be deferred until 1st October 2020.

The policy brief said that HMRC “remains committed to the introduction of the reverse charge and has already increased compliance resource”. The tax authority will “work closely with the sector to raise awareness” and help “all businesses” to be ready “for the new implementation date”.

Brian Berry, Chief Executive, FMB, said: “I’m pleased that the Government has made this sensible and pragmatic decision to delay reverse charge VAT until a time when it will have less of a negative impact on the tens of thousands of construction companies across the UK.

“To plough on with the October 2019 implementation could have been disastrous given that the changes were due to be made just before the UK is expected to leave the EU, quite possibly on ‘no-deal’ terms.”

The Chartered Institute of Taxation (CIoT) has also welcomed the government’s clarity, which should ease fears among suppliers and customers over VAT disputes.

Linda Skilbeck, Vice-Chair of the indirect taxes sub-committee, CIoT, said: “If the Government had pressed ahead with a start [for the VAT reverse charge regime] this October we envisaged significant confusion amongst businesses, leading to disputes between suppliers and customers as to whether or not VAT should be charged.

“A start date of October 2020 is more sensible. This should allow time for a dedicated information campaign to be operated by HMRC, with the assistance of industry and professional bodies.”

Concerned about how next year’s VAT reverse charge could affect your construction business? Contact us today for friendly, jargon-free advice on your VAT position.

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Date published 10 Sep 2019 | Last updated 10 Sep 2019