Reverse charge VAT for construction services postponed
Aug 11, 2020
The new anti-fraud domestic reverse charge VAT scheme was due to be introduced in the construction sector from 1 October 2020, but it has now been postponed for a period of 5 months until 1 March 2021. It was originally scheduled to come into force in October 2019, but due to Brexit and insufficient preparation time it was pushed back. Now the start date has been delayed once more – this time due to the impact of the coronavirus pandemic on the construction sector.
This delay will provide a welcome relief to many in the building industry. The new reverse charge system requires a VAT-registered customer to pay the VAT on certain services directly to HMRC rather than to the supplier, by making an adjustment on their VAT return. This prevents a fraudulent supplier invoicing for work which includes VAT, and then failing to account for the VAT due to HMRC. However it’s a complicated system which will require adjustments to contracts and software updates, and it will affect businesses’ cash flow. So taking into account the current economic climate, implementing these changes in October 2020 would certainly have proved difficult.
Cash flow considerations of reverse charge VAT
Although the postponement of this complex reverse charge VAT scheme is a sensible move, it’s important to bear in mind that its new start date of 1 March 2021 is very close to 31 March 2021. This is the deadline set for paying the VAT arrears deferred during the VAT payment holiday between 20 March and 30 June 2020, and so it could create cash flow concerns for some construction businesses.
Change in legislation
As well as delaying the implementation of reverse charge VAT, the government has also amended some of the original legislation which was set out in April 2019. In its Revenue and Customs Brief 7, it outlines a change to the exclusion requirements of end-users and intermediaries. This means that if businesses want to be excluded from the reverse charge because they are an end user or an intermediary supplier, they must now inform their sub-contractors in writing that they are end users or intermediary suppliers.
If you have any queries or concerns about preparing for reverse charge VAT and how it’s going to affect you, please contact the team who will be happy to help.