Accounting for VAT extension for construction businesses

The Chartered Institute of Taxation (CIOT) welcomes that construction businesses will get an extra five months to prepare for a major change in accounting for VAT, because of the impact of Covid-19

The new rules mark a complete overhaul of the way VAT is payable on building and construction invoices, as part of moves to reduce fraud in the sector.

Without a delay there was a risk this major tax change risks hitting SMEs the hardest at a time when they need to protect jobs and livelihoods.

Under the domestic reverse charge the customer receiving the service will have to declare the VAT to HMRC in its own VAT return instead of paying the supplier.

The changes only apply to supplies of building or construction services made to or received by businesses registered for UK VAT, where such a supply must be reported through the Construction Industry Scheme (CIS). Hence, it will not apply to consumers or businesses customers not meeting the reporting criteria.

HMRC announced late last week (5 June) that the introduction of the domestic reverse VAT charge for construction services has changed from 1 October 2020 to 1 March 2021.

HMRC had already pushed back the original start date of 1 October 2019 by a year, to give businesses more time to prepare. CIOT welcomed this first delay, believing there was substantial evidence of a lack of awareness of this change, and a lack of preparedness even among those businesses who were aware of it.

Linda Skilbeck, vice chair of CIOT’s Indirect Taxes Committee, said: ‘We welcome the further delay to the implementation of the domestic reverse charge for construction services to 1 March 2021 because of the many unexpected pressures caused by the pandemic and the lockdown on construction businesses, of which a significant proportion are SMEs.

‘The cash flow effect of the domestic reverse charge will be significant, and this is compounded by the added effect of reduced business activity due to Covid-19 restrictions.

‘The change to the legislation to clarify the position as to when the reverse charge applies should also lessen the chance of disputes between suppliers and customers as to which party in the supply chain should be accounting for VAT.’

Activity in construction has dropped significantly due to Covid-19. It is likely that firms that have accessed emergency finance through government-backed schemes will be diverting their profits to pay back these loans.

They will therefore struggle to accumulate the working capital necessary to mitigate the impact on cashflow of reverse charge VAT.

The impact on cashflow is especially problematic for firms purchasing high value materials that are VAT-rated, but delivering construction services subject to reverse charge VAT.

Skilbeck added: ‘We hope HMRC will work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses are ready for the new implementation date.’

Richard Dalton, tax partner at BDO said: ‘While the delay in the introduction of the Domestic Reverse VAT Charge for Building and Construction Services (DRC) will provide affected businesses with additional time to prepare for the impact on systems and cash flow, the revised timing of the introduction to 1 March 2021 is also likely to have a potentially unforeseen consequence.

‘Construction businesses that deferred VAT payments that were due between 20 March 2020 and 30 June 2020 as part of the UK government’s Covid-19 measures will be required to make these payments on or before 31 March 2021, meaning that cash flow in March 2021 is likely to be a major issue in the construction sector and businesses should be focusing on the issue at the earliest opportunity.’

 

Further reading:

Delay to VAT reverse charge on construction services

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