The Chartered Institute of Taxation (CIOT) has called on HMRC to delay a major change in accounting for VAT, saying SME construction firms have not had adequate time to prepare.
In a letter sent to HMRC, the CIOT presented its concerns about the new VAT reverse charge, which is set to be introduced from 1 October 2019.
Linda Skilbeck, vice-chair of CIOT’s 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.
“Such a campaign could include direct communications with businesses in the sector, particularly those registered for the Construction Industry Scheme, as well as improvements to the content and accessibility of guidance on GOV.UK.”
Some 150,000 businesses in the construction and building sector will be affected by the change, and the CIOT is concerned there will be a flurry of disputes between suppliers and customers over whether or not VAT should be charged.
The body hopes that a delay to the change will reduce the number of such disputes.
In a recent survey undertaken by the Federation of Master Builders, 69% of construction SMEs were found to have not even heard of the new reverse charge, and CIOT said that it has found similar unawareness amongst its own members.
What is the reverse charge?
The aim of the domestic reverse charge is to combat missing trader fraud in the construction sector.
VAT registered businesses, which supply certain construction services to another VAT-registered business for onward sale, will not be required to account for VAT, but must issue an invoice stating that the service is subject to the domestic reverse charge.
The recipient of the supply must then account for the VAT due on the supply through its VAT return, instead of paying VAT to the supplier.
The supplier may also recover that VAT amount as input tax, subject to the normal rules for claiming credit.
Unlike other types of reverse charges, the value of such reverse charge services will not count towards the VAT registration threshold.
While the CIOT has clarified that it supports cracking down on fraud, it fears that the charge being introduced in October will cause too much disruption, and there has not been enough time for businesses to become aware of the change.
Lack of clarity from HMRC
The CIOT sent the letter on 29 July, expressing their concern that communication and publicity by HMRC have been limited, considering the change is highly significant to the industry.
Technical guidance was published on GOV.UK on the 7 June that was meant to be have been published six months in advance of the change.
With the deadline looming, the guidance remains a work in progress with further clarity needed in some areas, says the CIOT, also saying that the anticipated level of publicity required to introduce the scheme has not been followed.
The GOV.UK page titled ‘VAT for builders’ make a passing reference to the changes under the subheading ‘Houses and Flats’, despite the reverse charge also applying to commercial works.
Skilbeck said: “We believe there will be significant confusion amongst businesses in the early days of the change, undoubtedly leading to disputes between suppliers and customers as to whether or not VAT should be charged.
“Many businesses will ring HMRC’s phone lines, which will need to be adequately resourced and trained to deal with these queries. At the same time, businesses and HMRC will be dealing with the implementation of Making Tax Digital, as well as the consequences of Brexit.
“As noted in the policy paper, businesses may be unprepared for the cash flow implications of the reverse charge, potentially leading to financial difficulties and even insolvency in the worst cases, as well as significant levels of business disruption even among larger companies.”