Construction industry reverse charge VAT ‘chaos’

Just over two months before major changes to VAT invoicing take effect for the construction industry, two thirds of SMEs in the sector know nothing about the new reverse charge regime, reports Pat Sweet

The Federation of Master Builders (FMB) is calling for a six-month delay to implementation stating that levels of awareness about the changes to VAT reporting are low and few companies have made preparations for it.

In a complete overhaul of the way VAT is payable on building and construction invoices, the introduction of the domestic reverse charge from 1 October 2019 means that the customer receiving the service will have to pay the VAT owed straight to HMRC instead of paying the supplier if they report under the Construction Industry Scheme (CIS).

A survey of around 8,000 SME construction firm FMB members found that 69% were not aware of reverse charge VAT at all.  Of those who were, 67% have not prepared for the changes, and the industry body is warning of potential ‘chaos’ when the new regime begins.

In a letter to Jesse Norman, financial secretary to the Treasury, the FMB said HMRC had failed to communicate details of the new scheme clearly enough, or to emphasise how major the changes are.

The industry body warns reverse charge VAT will have a serious impact on cash flow, as well as being a significant administrative burden, fundamentally changing the way construction companies invoice their clients and pay their taxes to HMRC. 

It says while larger construction companies will have in-house finance teams to handle implementation, construction SMEs and sole traders, which make up 9% of the one million construction firms operating in the UK, will have to do this whilst also running their business.

The letter stated: ‘We believe HMRC could have done much more to prepare the industry for the changes and the action taken so far has not been enough for an industry as large and complex as construction.

‘For example, the guidance document was only published four months before the changes are due to come in.  Furthermore, the guidance has been criticised for being unclear and contradictory in places.’

HMRC was also due to have a dedicated website and marketing campaign for the changes to help prepare the hundreds of thousands construction companies who will be impacted by the changes, but the FMB’s letter claims these have yet to materialise.

Brian Berry, chief executive of the FMB, said: ‘Construction companies are already struggling with Brexit uncertainty, sky-rocketing material price rises and skill shortages, and reverse charge VAT is yet another thing for them to deal with.

‘What makes things worse is that HMRC has failed to deliver on its promise to help the industry to prepare. The guidance is not user-friendly and even tax experts are scratching their heads over it.

‘That’s why we are calling on the government to delay the changes by another six months and to use the extra time to improve the guidance and work with us to undertake a more intensive communications campaign. HMRC should also consider holding workshops across the country to explain the changes.’

FMB letter to financial secretary to the Treasury

Pat Sweet | 24-07-2019

Further reading

Construction sector faces reverse charge on VAT from October published 26-06-2019

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