Will changes to the reverse charge be reversed for the construction sector?

HMRC has been publicising, with varying degrees of success, its launch of a new VAT anti evasion measure targeted at the Construction sector. The measure known as the VAT Domestic Reverse Charge is targeted at specific supplies within the construction sector. It will be introduced on 1 October 2019. 

However, the Federation of Master Builders (FMB) has found that two thirds (69 per cent) of construction SMEs have not heard of the reverse charge; and of those 67 per cent have not prepared for the changes. 

This is why the FMB, and also the Chartered Institute of Taxation (CIOT), is calling for a delay to the 1 October implementation date, due to lack of preparedness in the sector. But will HMRC listen to the concerns? 

This new measure will have a profound impact on a construction business’s invoicing routine. Further, it will have a serious cashflow impact, most likely in the early stages of the supply chain, where contractors will no longer charge and collect VAT from their customers. This VAT cash can sometime be used by businesses to fund working capital, before it’s paid over to HMRC via its VAT return.

The aim of the VAT Domestic Reserve Charge is to reduce the amount of VAT fraud in the construction industry, by asking customers to self-account for the VAT due on a supply, rather than it being charged by the supplier. 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.

Although the concept of a customer self-accounting for the VAT due on a supply may seem straight-forward, the question of ‘when’ and ‘how’ adds to the complexity. A supplier, and a customer, need to consider and apply all the relevant rules under this new measure.  

HMRC is promising a ‘light touch’ on the introduction of the VAT Domestic Reverse Charge on compliance failures for the first six months following implementation on 1 October 2019, provided that HMRC feels that the taxpayer has attempted to follow the new rules. What will be considered by HMRC as enough weight of evidence that an attempt by the business concerned has been made to follow the new rules, is not clear.

FMB’s findings suggest that the construction industry is not yet ready for these changes. Now, with the CIOT also raising its concerns as well, and urging the Government to postpone the introduction of these changes until 1 April 2020, it will be interesting to see whether notice is now taken by HMRC of the extent that the sector is not fully aware or prepared for the forthcoming changes.

This seems somewhat familiar to the recent and ongoing introduction of Making Tax Digital, where, despite concerns around taxpayer preparedness, HMRC proceeded with a 1 April 2019 introduction for the majority of taxpayers. Those taxpayers are now experiencing conflicting notifications from HMRC, issues with the sign-up process and lengthy delays. Maybe this time feedback will be acknowledged by HMRC and acted upon.