Howz-VAT: HMRC reverse charge is out (for now)

After an emotional rollercoaster of a summer for English Cricket fans HMRC has accepted the construction sectors ‘appeal’ for a ‘review’ of the Reverse Charge VAT legislation, due to come in to force on the 1st October 2019.

Reverse Charge VAT – what is it?

Combatting missing trader fraud has become a priority for HMRC over a number of years and is identified as one of the key factors contributing to the tax gap. The tax gap is the difference between the amount of tax that should be paid to HMRC and that which is actually paid.

In the Autumn of 2017 HMRC announced that they would consult on implementing a reverse charge, due to systemic fraud in labour supply chains.

For those supplies affected, the supplier will no longer account for VAT as output tax, but instead the customer will declare VAT on behalf of the supplier on their VAT return and, subject to the normal rules, will recover that VAT as input tax.

The actual VAT liability of construction services will remain unaffected.

The services affected are wide ranging and apply to all relevant construction services. The legislation has set out in some detail the services affected but in reality, they affect those services also covered by the Construction Industry Scheme (CIS). Employment business are not impacted (unless their supply includes materials).

Postponed until 2020

Reverse charge VAT was due to come into force from 1st October 2019 – but on the 6th September 2019 the Government announced its decision to delay implementation until 1st October.

A statement from HMRC said that the change would be delayed because industry representatives had raised concerns that the sector was not ready for it.

A group of construction industry bodies wrote to the government warning of the problems it would cause companies last month, asking for a delay.

The statement from HMRC added that the body “remains committed to the introduction of the reverse charge and has already increased compliance resource”.

Federation of Master Builders (FMB) chief executive Brian Berry called the delay “a victory for common sense”.

He added: “I’m pleased that the government has made this sensible and pragmatic decision to delay reverse charge VAT until a time when it will have less of a negative impact on the tens of thousands of construction companies across the UK.

Research by the FMB in July found that two-thirds of SMEs weren’t aware of the imminent changes. The 12-month reprieve for those businesses impacted will allow more time to prepare and to implement new processes.

Software firms will also have ample time to develop, test and implement functionality to deal with the new legislation.