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 is due to the impact of the coronavirus on the construction sector and 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 significant change.
The domestic reverse charge - background
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, stating that the service is subject to the domestic reverse charge. The recipient must then account for the VAT itself on its VAT return, and recover that VAT as input tax, subject the normal rules.
In general, only invoices issued for construction services supplied to an ‘end user’, that is a business that will not make an onward supply of construction services, are excluded from the scheme and subject to existing VAT accounting 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.
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 by five months. It says that, in the intervening period, it will continue to identify and tackle existing perpetrators of the fraud and will also 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 of 1 March 2021.
HMRC has also announced that businesses who will be excluded from the reverse charge because they are end users or intermediary suppliers will be required by law to confirm their status in writing to their sub-contractors. HMRC guidance previously recommended this as best practice, but it will now become a legal requirement.
This is a welcome development as it will make it easier for suppliers to obtain evidence of their customer’s end user status and will hopefully address concerns that some end users may be tempted to deliberately conceal their end user status from suppliers, in order to gain a cash flow advantage from not having to pay VAT on the construction services they purchase. So far, however, no details of the amended legislation or how it will work in practice have emerged.
What businesses should do now
Although any extension is good news, HMRC has only delayed the start date of the domestic reverse charge by five months, not the twelve-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.
For further information please contact Ian Carpenter.