Insights

Some important VAT changes planned for the construction industry have been further delayed as a result of the impact of Covid-19. This relates to the domestic reverse charge rules, which will require the end customer receiving a construction related service to pay any VAT due directly to HMRC, instead of paying it to the supplier.

The ruling will now come into effect on 1 March 2021, giving construction firms a chance to recover from the disruption caused by Coronavirus.

It is the second time a delay to the domestic reverse charging rules have been announced, after already being postponed to October 2020. The postponement has been welcomed by industry bodies including the Chartered Institute of Taxation (CIoT), because it’s anticipated that not receiving VAT payments directly will create cashflow problems for SME construction businesses, some of whom have already been hit hard by Coronavirus. It is envisaged that there may be disputes between suppliers and customers over which party in the supply chain should account for VAT and giving them some extra time will lessen the chance of this occurring.

What is the domestic reverse charge?

The domestic reverse VAT charge marks a big change to the way VAT is collected in the building and construction industry.

It is specifically for services which are reported under the construction industry scheme (CIS). For example, construction work involving:

• a permanent or temporary building or structure
• civil engineering work like roads and bridges
• preparing the site, e.g. laying foundations and providing access works
• demolition and dismantling
• building work
• alterations, repairs and decorating
• installing systems for heating, lighting, power, water and ventilation
• cleaning the inside of buildings after construction work.

When it comes into effect, the customer who receives a service will pay the VAT due directly to HMRC on their VAT return, instead of paying it to the supplier.

The domestic reverse charge is intended to prevent cases of VAT fraud in the construction industry, whereby suppliers have charged their customer VAT but kept the money instead of paying it to HMRC.

How to get ready for domestic reverse charge VAT?

If your business is impacted by these changes you will need to prepare. Although the measure has been postponed, it has not been cancelled altogether.

Ensure you have completed the following well in advance of the 1 March 2021 start date:

• Check whether the reverse charge affects either sales and/or purchases made by your business;
• Check that your accounting software will deal with the reverse charge and update it as necessary;
• Assess the impact of the change on your cashflow;
• Ensure any staff responsible for VAT accounting are able to deal with the reverse charge.

If you're a contractor, you'll need to review all of your contracts with subcontractors, work out whether the reverse charge will apply, and notify your suppliers if it will.

If you're a subcontractor, you will need to contact your customers to find out whether the reverse charge will apply.

HMRC has said that it will show flexibility and some leniency where businesses make genuine errors - provided that they are corrected quickly and you can demonstrate you have tried to comply with the rules and "acted in good faith".

If you need help with understanding how the reverse charge works and what you need to do ahead of the new implementation date, one of our VAT specialists can support you.

Please email: partners@rjp.co.uk