HMRC postpones domestic reverse charge for construction services

HMRC has decided to postpone the introduction of the domestic reverse charge for construction services for a period of twelve months, until October 2020.

The government’s agreement will allow more time for businesses registered for VAT in the construction sector to adjust, enabling them to fully prepare for the transition.

Brian Palmer, AAT tax policy expert, believes the Government appears to have listened to its people. Reacting to the news, he said: “Seemingly, and in spite of whatever views people have on the Government’s approach to Brexit, in this area at least this appears to be a Government that listens.”

In its brief, HMRC said: “Government has listened to the concerns raised by industry representatives and recognises that some businesses in the construction sector require more time to implement the VAT domestic reverse charge for building and construction on 1 October, and that this is close to the date the UK is due to exit the EU.

“The Government remains committed to the introduction of the reverse charge. HMRC has already increased compliance resource and put in place a robust compliance strategy for tackling fraud in the construction sector using tried and tested compliance tools.”

As well as businesses, HMRC intends to use the extended time frame to better prepare itself. The government added: “In the intervening year, HMRC will use the time to focus additional resource on identifying and tackling existing perpetrators of the fraud.”

Palmer admits HMRC’s decision to slowdown the introduction makes ‘absolute sense’.

“This slowdown to the introduction of what is a well-intentioned measure makes absolute sense,” Palmer said. “With much of the focus in the last year or so being on the delivery of Making Tax Digital for VAT, many software developers had not had the bandwidth to have their products ready to support those affected. This is particularly true given all of the uncertainty that abounds at the moment.”

The purpose of the domestic reverse charge is to reduce the disclosure of VAT owed to HMRC, following similar measures put into place in response to criminal threats such as for mobile phones or computer chips.

The brief

The Revenue and Customs Brief 10 published this year offers a wide of range of information regarding the now postponed domestic reverse charge for construction services.

The domestic reverse charge is now set to be implemented in October 2020, affecting only construction service businesses registered for VAT. A UK customer who acquires supplies for construction services must account for VAT due on these materials on their VAT return rather than the supplier. In order words, the domestic reverse charge prevents fraudsters from stealing VAT owed to HMRC.

HMRC also underscores the need for businesses to adapt their accounting systems for dealing with VAT. Many of these will experience a negative impact on cash flow whilst no longer receiving VAT payments from customers for services where charges apply.

The government wants all businesses in the construction sector to be ready for the new implementation, acknowledging that October 2019 would be too soon.

In its statement, HMRC said: “To help businesses get ready in the next 12 months, HMRC will continue to work closely with the construction sector to raise awareness and provide additional guidance and support to ensure all business will be ready for the new implementation date.”

Preparation

Businesses will need to check whether the new rule will affect their sales or purchases in order to be prepared for the 2020 implementation.

For accounting, they will need to make sure their systems are updated to deal with the reverse charge. The staff responsible for accounting will also have to be familiar with the domestic reverse charge and understand how it works.

HMRC also suggested it will be easier if one VAT accounting treatment is provided to all contracts with a particular sub-contractor, in order to avoid late payments and uncertainty.