The government has agreed to delay the implementation of domestic reverse charge VAT for construction services by a year, until October 2020.
The move follows intense lobbying by the construction industry, which had warned that companies were not ready for what will be a significant change to the management of their business finances as the necessary information had not filtered through in time.
Last month a coalition of construction associations wrote to the chancellor of the exchequer asking for a six-month delay to the planned 1st October 2019 introduction of reverse charge VAT. They warned that customers paying VAT directly to HM Revenue & Customs instead of to the service supplier would have a disruptive impact on contractors’ cashflow, for which they needed to prepare.
It also coincided with the disruption of Brexit, and no one knowing what is going on there or what preparations might be required.
The chancellor has now given an additional 12 months for the construction industry to prepare – double what was asked for.
In a briefing note, HM Revenue & Customs said: “Industry representatives have raised concerns that some businesses in the construction sector are not ready to implement the VAT domestic reverse charge for building and construction on 1st October 2019.
“To help these businesses and give them more time to prepare, the introduction of the reverse charge has been delayed for a period of 12 months until 1st October 2020. This will also avoid the changes coinciding with Brexit.
“HMRC remains committed to the introduction of the reverse charge and has already increased compliance resource. It has put in place a robust compliance strategy for tackling fraud in the construction sector using tried and tested compliance tools.
“In the intervening year, HMRC will focus additional resource on identifying and tackling existing perpetrators of the fraud. It 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.
“HRMC recognises that some businesses will have already changed their invoices to meet the needs of the reverse charge and cannot easily change them back in time. Where genuine errors have occurred, HMRC will take into account the fact that the implementation date has changed.
“Some businesses may have opted for monthly VAT returns ahead of the 1 October 2019 implementation date which they can reverse by using the appropriate stagger option on the HMRC website.”
The news has received a warm welcome from industry associations.
Federation of Master Builders chief executive Brian Berry, who took a leading role in the lobbying campaign, 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 situation hasn’t been helped by the poor communication and guidance produced by HMRC. Despite the best efforts of construction trade associations to communicate the changes to their members, it’s concerning that so few employers have even heard of reverse charge VAT. Indeed, according to research by the FMB published in July, more than two-thirds had not heard of the VAT changes and of those who had, around the same number hadn’t prepared.”
The Building Engineering Services Association (BESA) was another signatory to the letter sent last month to chancellor Sajid Javid seeking an extension.
BESA chief executive David Frise said: “This is a big win for our members. Thanks to the concerted advocacy efforts of the FMB, BESA, and other trade bodies, common sense has prevailed. If the government had not delayed the changes, many SMEs would have been caught off guard, facing increased burden and restricted cash flows while simultaneously bracing for the serious disruptions caused by the UK’s planned withdrawal from the European Union on 31st October.
“This gives us plenty of time to help businesses plan a smooth transition in the way VAT is charged by October 2020.”
The National Federation of Builders (NFB) was another signatory to the letter. Its chief executive, Richard Beresford, said: “Contractors and subcontractors weren’t ready for reverse charge VAT and we are delighted that the government has listened to our industry campaign to seek a delay.”
The FMB’s Brian Berry concluded: “It is reassuring that the government has listened to the construction industry, which has come together to make clear to the government that sticking to the October 2019 timetable could lead to a loss of productivity, reduced cashflow and in the worst cases, lead to a hit on jobs, tipping some companies over the edge. What’s required now is for the government and industry to work together to deliver a sector-wide communications campaign, which must include plain English guidance on the changes. We also want to work with the government to deliver workshops aimed at construction employers, held in locations across the country, to explain what’s happening and why.”
Source: Construction News