VAT reverse charge: preparation despite delay

3 December 2019

Previously planned for October 2019, the domestic reverse charge for the construction industry will come into play a year later, on 1 October 2020.

The application remains the same: the customer will become liable to account for the VAT in purchases, rather than the supplier. Where applicable, for every transaction made, the VAT will be stated on the invoice as a reverse charge; so instead of the supplier charging and accounting for the VAT, it will be the recipient who will account for the VAT.

Despite the delay, HMRC “remains committed” to the introduction of this initiative to tackle missing trader fraud. The delay ensures that it won’t coincide with Brexit, and gives affected businesses more time to implement the changes needed to comply.

Although the delay has been heralded as a success for the industry, having been campaigned by the National Federation of Builders among others, it is important that additional time is not wasted in order to be prepared.

So, who does this affect?

Focused on businesses who operate within the Construction Industry Scheme (CIS), this reverse charge will apply to ‘specified’ construction services between VAT registered businesses where the recipient then makes an onward supply of those ‘specified’ services. This includes:

  • construction, alteration, repair, extension of a building;
  • painting and decorating;
  • demolition of buildings;
  • civil engineering;
  • installation of heating, lighting and air-conditioning.

It’s important to note that contractors and sub-contractors who supply their services to larger contractors will be the main ones affected by the changes.

What changes will be needed?

Affected businesses will need to make sure their accounting systems are fully equipped for the new legislation and are capable of processing reverse charge supplies, whilst making regular checks to ensure that supplies and purchases are managed correctly.

You will need to adjust your accounting systems to include a tax code for all reverse charge transactions. This will mean the accounting treatment will be correct and ensure that all VAT returns are compliant.

Many businesses currently rely on the additional 20% as working capital before paying it over to HMRC on their quarterly VAT return. Subcontractors who are reliant on VAT collected as part of their cash flow may suffer financially as a result of the reverse charge.

Will there be penalties?

HMRC realise that the implementation of this will cause some difficulties – the year delay shows how the industry needed additional time. This understanding will also extend to the first six months from October 2020, where HMRC officers will apply a ‘light touch’ when dealing with any errors. This doesn’t mean that assessments won’t be made, so you will need to demonstrate that you are trying to comply and are acting in good faith.

What should I do before October 2020?

If you will be affected by the introduction of the domestic reverse charge, it’s important to make the necessary changes and understand the day-to-day impact the change will have on your business.

If you have already made changes:

  • If you have already changed your invoices to meet the needs of the reverse charge, HMRC understand that it may not be easy to change them back in time. Where genuine errors have occurred, HMRC will take into account the fact that the implementation date has changed.
  • You may have opted for monthly VAT returns ahead of the 1 October 2019 implementation date. This can be reversed by using the appropriate stagger option on the HMRC website.

Preparation for the 2020 deadline:

  • Review supplies made to and from other VAT registered contractors to establish whether these will be subject to a reverse charge from October 2020. A confirmation of their VAT registration and CIS status is the best source.
  • Consider the adaptations that will need to be made to your accounting systems to deal with this change.
  • Think about the changes to your cash flow from October 2020 when you will no longer receive VAT from your customers, and if there are any ways to mitigate this impact.

For more information on the changes to the way business in the construction industry will operate and how to be fully prepared for the VAT reverse charge in October 2020, contact a member of our tax team today.

Alternatively, fill out our contact form here.