VAT Reverse Charge Stores Up Double Whammy Warning

A TAX SPECIALIST is warning that the delay to the introduction of the VAT Reverse Charge is storing up a VAT double whammy for construction businesses.

The domestic reverse charge for construction services and materials was due to come into force on the 1 October 2020.

Last week, the government announced that the new method of accounting for VAT, shifting the responsibility for reporting and paying VAT from the supplier to the buyer, will now start from 1 March 2021.

The VAT reverse charge is likely to cause a cashflow interruption for supplier businesses, as they will no longer be able to invoice for VAT, losing the use of that VAT money for up to three months until it has to be paid to HMRC.

The new introduction date coincides with when VAT payments will become due for those businesses that have deferred their payments under the coronavirus VAT deferment scheme.

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

VAT fraudsters

The VAT reverse charge is designed to remove the scope for fraudsters to steal the VAT due to HMRC and follows similar measures introduced in other industries. However, its introduction has proved controversial in the construction sector because contractors will be reliant on the end customer in a supply chain to determine if supplier’s goods or services should be VAT charged and by how much.

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.”