Reverse Charge VAT to be Delayed Until March 2021

THE INTRODUCTION of the domestic reverse charge for construction services will be delayed for five months.

The new way of accounting and paying for VAT had been due to come into force on 1 October 2020 and will now be delayed until 1 March 2021 due to the impact of the coronavirus pandemic on the construction sector.

The Reverse Charge moves the responsibility for reporting a VAT transaction from the seller to the buyer of goods or services. The buyer of the goods or services reports both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return.

James Talman CEO NFRC

Chief Executive of the National Federation of Roofing Contractors (NFRC), James Talman comments, “I am delighted that the Government have heeded industry’s call to delay this disruptive policy. Those extra few months will be a lifeline for many construction firms. This change would have dried up cash flow in the supply chain just as firms started to recover from the impact of Covid-19”

“However, there is no guarantee that the industry will ready for the changes next March, and we would like to have seen a longer delay, or even scrapping the idea entirely. The Government should keep this policy continually under review and consider extending this delay if needed.”

VAT fraudsters

The change is designed to remove the scope for fraudsters to steal the VAT due to HMRC and follows similar measures introduced in other industries.

Subcontractors will no longer get VAT payments from customers for services where the reverse charge applies and will no longer be responsible for paying it on to HMRC in a VAT return.

Because the change will have an impact on cash-flow and administration processes for businesses, there was a year’s delay to allow firms time to prepare.

Announcing the additional delay, HMRC has also made it a requirement for businesses to inform their subcontractors in writing that they are end users or intermediary suppliers to be excluded from the reverse charge.

Comment

Richard Dalton, tax partner at BDO comments, “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.”