The Construction Reverse VAT Charge Scheme has been delayed from 1 October 2020 to 1 March 2021 following the COVID-19 pandemic.
The Scheme involves businesses in the construction industry, where customers are required to pay across the VAT element of invoices to HMRC, rather than the supplier, in an effort to reduce fraud.
However, the Scheme has come under criticism for the effects it would have on the construction industry, and the burden it imposes on businesses that it will effect as well as their current lack of preparedness are causing serious concern.
What is the Construction Reverse Charge VAT Scheme?
How is VAT usually charged?
Value Added Tax, or more commonly known as VAT, is a tax charged by businesses that the buyer pays. However, the burden of paying it across to the government is with the business that has sold the goods. It is a scheme that effectively allows the government to collect tax, butplace the burden of administering and collecting it on businesses who have to charge it.
VAT is charged on goods or services when they are sold. The difference between the VAT on purchases (what is referred to as ‘Input VAT’) and the VAT on sales (what is referred to as ‘Output VAT’) is paid across to HMRC every quarter. Some businesses elect to do this every month, depending on what works for them.
The Construction Reverse Charge VAT Scheme is different
In an attempt to reduce fraud in the construction industry, there have been radical changes implemented by HMRC that impose rules on the companies that are targeted by the new laws that are very different from how VAT has been collected and reported historically.
The onus is now on the customer to pay the VAT charged on invoices directly to HMRC, rather than to the supplier, if they report under the Construction Industry Scheme (CIS).
It should be noted that this only applies to businesses that are buying or selling products between VAT-registered contractors and sub-contractors within the construction industry.
When does the Construction Reverse VAT Scheme apply?
The Scheme applies to certain kinds of construction services completed in the UK, along with the building and construction materials used within the services. It doesn’t apply for materials supplied independent of any construction services.
The charge is an extension of the CIS scheme, and for any services undertaken by the subcontractor, the contractor paying them will be responsible for paying them, net of any CIS deductions and National Insurance, as well as VAT. The contractor will be responsible for paying across the VAT to HMRC, not the sub-contractor who raised the invoice and completed the works.
What is the purpose of the scheme?
The construction industry has been notorious in the past for fraud and has been targeted by criminals because of the ease in which this has been achieved historically.
Similar schemes have been implemented in the mobile phone retailers and wholesale energy suppliers to good effect.
By implementing a reverse charge scheme, customers will pay the VAT charge over to HMRC, rather than to the supplier. HMRC then has more confidence in that they will receive their money, and the suppliers cannot disappear without paying their VAT bill, whilst pocketing further profit from the job they have completed.
Why has the Construction Reverse Charge VAT scheme been controversial?
The Scheme will lead to much more paperwork, increasing the burden on construction employers. In an industry where payments from customers are often delayed, it is likely to cause significant cashflow problems throughout the industry.
Many firms in the industry believe it will lead to problems with productivity and cashflow difficulties, which ultimately will lead to job losses and have a considerable financial impact on the sector as a whole.
Small businesses in the industry would be most at risk. A lack of funds could cause some to being unable to trade and having to cease trading permanently.
Introduction of the scheme delayed once again
The impact of COVID-19 has led to the implementation of the scheme being delayed once again until 1 March 2021, having been originally planned to be effective from 1 October 2020.
This come following substantial lobbying by the construction industry towards the government, citing the following issues:
- 39% of construction companies are unaware of reverse charge VAT
- 36% are unprepared for its implementation
- 30% have not even discussed it with their accountant or financial adviser
Despite a request for a 12-month delay to the scheme, government only agreed to postpone it for five months. HMRC are keen to continue with the scheme and want it implemented as soon as possible. Given that they estimate to collect £500m of tax per annum through the scheme, it is hardly surprising.
What to do next
The Construction Reverse Charge VAT Scheme looks set to be implemented from 1 March 2021, and will be a legal requirement. It is therefore important that businesses are prepared for it when it begins.
HMRC has suggested doing the following to ensure businesses are prepared:
- Investigate whether the Scheme applies to the business’s sales, purchases or both;
- Ensure that accounting software is sufficient and updated to deal with the Scheme;
- Consider what implications there are for the cashflow of the business, and plan for it in advance of the scheme becoming live;
- Ensure that staff responsible for charging VAT are familiar with the new rules and the date they will become law.
It would be advisable to review any contracts that construction businesses have, and to have conversations with customers and suppliers, so that measures can be put in place.
But most importantly, if in any doubt, speak to an accountant. Applying the rules correctly and ensuring that businesses have the correct processes in place may seem a bit of a minefield. HMRC will issue fines and penalties if it is not implemented properly, so seek professional financial advice to ensure that all processes and requirements are met.
An Accounting Gem are an experienced and friendly firm of accountants and are here to help if you have concerns about how you are going to cope with the new legislation. Please call on 01473 744 700 or email us at firstname.lastname@example.org to see how we can assist you and your business.