The new domestic reverse charge was due to be introduced this October but a recent announcement means that the change has now been delayed until October 2020. The reverse charge will apply to construction services and news of the twelve-month delay will be welcomed by the vast majority in the industry.
For countless construction companies, this charge will mean a dramatic change to their accounting practices, not to mention their cash flow. The delay will at least allow further time for those affected to prepare.
What is the VAT reverse charge?
The reverse charge is being introduced in order to tackle the issue of missing trader fraud within the construction industry. Essentially it means that those providing certain construction services within a supply chain, whilst still required to issue a VAT invoice to customers, will not actually receive a VAT payment. Instead the invoice will state that the domestic VAT reverse charge applies, effectively passing along the VAT charges to the end user (where no further construction services will be carried out).
This is the second time this reverse charge has been introduced, with businesses working in the sale of mobile phones and computer chips also required to charge for their services in this manner.
Labour supplied from Employment businesses
If an employment business supplies labour to a construction company then the reverse VAT charge will not be used as for VAT purposes, it is labour that is being supplied and not a construction service as the construction company is not paying the individual who is carrying out the construction work it is the Employment business. A recruitment agency is an Employment business and therefore supplies of labour to a client would remain the same and not affected by these changes. Labour supplied to an agency from an Umbrella Company or CIS Provider would also not be effected by these changes. This area was causing a lot of confusion in the industry but following a discussion between the Trade Association PRISM and HMRC around this, the guidelines were subsequently updated.
Impact on Construction industry
This change will arguably have a significant impact on the construction industry as a whole. Many construction companies would rely on their VAT as a vital source of cashflow, providing working capital throughout the year that would not need to be paid until their VAT return is due for payment. Under the new scheme, this will be taken away. This could also pose significant challenges for accountancy software, much of which has never had to deal with this type of VAT charge. For Recruitment agencies it will be your clients who are affected by this new legislation.
It is vital that those in the construction industry are aware of the changes and make adequate preparations.
You can find more information on the VAT reverse charge on the Gov.uk website or speak to a member of the Sterling team today, we will be more than happy to discuss how these changes will impact you.