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Accountants urge delay to VAT reverse charge

30 August 2019 | By Neil Gerrard

Accountants have added their voice to construction’s calls to delay the government’s planned introduction of the VAT domestic reverse charge, which subcontractors have warned could push them into negative cashflow.

The VAT anti-evasion measure targets specific suppliers within the construction sector and is due to be introduced on 1 October 2019.

Under the new scheme, companies who are VAT registered and Construction Industry Scheme registered will no longer pay VAT to the majority of their subcontractors. VAT will only be paid to companies that supply labour only and to the merchants and businesses that sell building materials only, without any fixing.

Now accountancy firm RSM has urged the government to delay its proposed implementation of the reverse charge amid concerns that companies were not ready for it.

Ian Carpenter, partner at RSM, said: “This new measure will have a profound impact on a construction business’s invoicing routine. Further, it will have a serious cashflow impact, most likely in the early stages of the supply chain, where contractors will no longer charge and collect VAT from their customers. This VAT cash can sometimes be used by businesses to fund working capital, before it’s paid over to HMRC via its VAT return.

“While this measure is being brought in by HMRC to fight fraud, the rules apply to all in the industry. Failure to comply will risk delayed payments by customers and penalties from HMRC. Businesses should be reviewing their supply chain now to get reading for the changes which are less than two months away. Better still, we would urge government to consider delaying the implementation date to allow the sector a chance to properly prepare.” 

Meanwhile, Linda Skilbeck, vice-chair of the Chartered Institute of Taxation’s (CIOT) indirect taxes sub-committee, said: “We are concerned about the combination of a substantial lack of awareness, and lack of preparedness even among those businesses who are aware of the measures.

“We urge the government to delay the current implementation date. A start date of 1 April 2020 is more appropriate. This should allow time for a dedicated information campaign to be operated by HMRC, with the assistance of industry and professional bodies.

RSM said that under the new system, customers were being asked to “self-account” for the VAT due on a supply, rather than it being charged by the supplier. In general, only invoices issued for construction services supplied to an "end user", that is a business that will not make an onward supply of construction services, are excluded from the scheme and subject to existing VAT accounting rules.

But it warned that although the concept of a customer self-accounting for the VAT due on a supply may seem straightforward, the question of when and how adds to the complexity. A supplier and a customer both need to consider and apply all the relevant rules under this new measure, it said.

It also warned that while HMRC is promising a “light touch” on the introduction of the VAT Domestic Reverse Charge on compliance failures for the first six months, following implementation on 1 October 2019, it wasn’t clear what would be considered by HMRC as enough weight of evidence that an attempt had been made.

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