As part of its continued efforts to reduce the tax gap, mentioned in the piece above, HMRC had intended to impose a new VAT reverse charge for domestic supplies of construction services. Responding to lobbying, HMRC has announced that the introduction of the VAT reverse charge for domestic supplies of construction services will be delayed from 1 October 2020 until 1 March 2021. This follows strong representations from industry groups, who recently warned the government that the coronavirus crisis meant construction companies no longer had the capacity to prepare for this major change.
What is the domestic reverse charge?
The new reverse charge will apply to supplies of certain construction services (broadly speaking, those defined as construction operations for the purposes of the Construction Industry Scheme) when the recipient then makes an onward supply of those same services. Under the new rules, the supplier must issue an invoice without charging VAT, including a statement that the service is subject to the domestic reverse charge. The recipient is then required to account for the VAT itself on its VAT return, and recover that VAT as input tax, subject to normal rules.
The aim of the new reverse charge is to reduce the amount of VAT fraud in the construction industry where dishonest suppliers go missing before paying the VAT they have collected to HMRC and is an important part of HMRC’s strategy to tackle the tax gap.
In general, construction services supplied to an ‘end user’, that is to an individual or a business that will not make an onward supply of construction services, are excluded from the scheme and will remain subject to existing VAT accounting rules.
The new regime will fundamentally change the impact of VAT on the whole sector. Its introduction has already been delayed twice amid concerns about awareness among smaller subcontractors, as well as the loss of cash flow when construction businesses can no longer use VAT collected as working capital before it is due to be paid to HMRC.
The Federation of Master Builders and other representative bodies wrote to the Chancellor of the Exchequer in May asking for the 1 October 2020 implementation date to be postponed for another year, citing concerns that the combined cash flow impact of the reverse charge and the coronavirus shutdown will endanger the survival of many construction businesses, especially SMEs.
HMRC has responded by delaying the start date of the reverse charge to 1 March 2021. It says that, in the intervening period, it will continue to identify and tackle existing perpetrators of the fraud and work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses will be ready for the new implementation date.
Although any extension is good news, HMRC has only delayed the introduction of the new regime by five months, not the 12-month period requested by the industry, which is likely to be dealing with the aftershocks of coronavirus for some time. Construction businesses and their customers still have a relatively short period in which to prepare, so operators should continue with the planning process to manage the impact on their cashflow and make the necessary changes to their accounting systems.