The domestic reverse charge (referred to as the reverse charge) is a major change to the way VAT is collected in the building and construction industry.
From 1st October 2019 the supply of construction services through the supply chain where payments are required to be reported through the Construction Industry Scheme (CIS) will fall under the VAT Reverse Charge rules.
Introduced as an anti-fraud measure by HMRC on unpaid VAT in the supply chain of construction services, the liability to account for VAT will be placed with the customer rather than the supplier. Impacting most on those in the supply chain who receive services, which they themselves use to make an onward supply of services (specified under the CIS) to an end-user/customer.
This could mean a significant impact on cash flow to those recipients i.e. contractors, who must now pay the VAT on the service for which they are receiving in addition to that in which with are charging the end-user/customer. The impact of the timing of this cash-flow poses significant concern to many – recent surveys show.
New data published by the Federation of Master Builders (FMB) shows that:
- Over two-thirds of construction SMEs (69%) have not even heard of reverse charge VAT; and
- Of those who have, more than two-thirds (67%) have not prepared for the changes.
This comes after HMRC published guidance on reverse charge VAT just four months before the changes were due to come into place. 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. 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.” In a letter to the Financial Secretary to the Treasury, Berry urges the government to delay their implementation for 6 months to avoid potential chaos.
The new domestic reverse charge will apply to supplies of ‘specified services’ between VAT registered businesses where the recipient then makes an onward supply of those specified services. Specified services are generally services that are defined as construction operations for purposes of the Construction Industry Scheme (CIS).
Details of what construction firms need to do to be ready for the change have been pubished on the HMRC website although it appears this is still leaving many confused. The FMB are the largest trade association in construction and are a source of knowledge and professional advice for its members including this topic. Read more about joining the FMB here.
JCB Finance offer a Hire Purchase facility called HP Plus which provides customers with the option to take payment holidays at short notice, without affecting their credit rating. This feature gives peace of mind when unforseen situtaions can add unwanted pressure to cash flow, just like these. Customers who wish to take their payment holiday or have any concerns about the impact of this change may have on their cashflow and forthcoming questions are encouraged to contact their JCB Finance Relationship Manager or Customer Services Team on 01889 590800.