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Ready for Reverse Charge VAT?

The Federation of Master Builders (FMB) has expressed its concern that the construction industry isn’t ready for the rollout of the new Reverse Charge VAT system due on October 1st, 2019. This comes after data collected by the FMB revealed that 69% of construction industry SMEs haven’t even heard of it, and of those that have, 67% have not begun preparations for it.

The FMB has written a letter to the Financial Secretary to the Treasury asking for an extension of the rollout date to avoid inevitable chaos and additional administrative burden. Disappointment in the UK government scheme plans has also been expressed, due to failed promises of a dedicated Reverse Charge VAT website and campaign to raise awareness and understanding for the construction industry. It notes that the guidance so far released is not user-friendly and added that ‘even tax experts are scratching their heads over it’.

What is Reverse Charge VAT?

According to the UK government website, the reverse charge VAT system (also referred to as the domestic reverse charge) will mean that any VAT due on the service provided will be paid to the HMRC by the customer, instead of the supplier. This significant change to the current system will be implemented to address part of the VAT tax evasion issue the UK is currently suffering.

Who will be affected?

The reverse charge VAT system will apply to individuals and businesses that are currently registered for VAT in the UK. It will affect the supply and receipt of specified services within the industry that are currently handled and reported using the Construction Industry Scheme (CIS). It is also thought that the definition of ‘specified services’ could encompass services such as those defined in the Construction Act as ‘construction operations’ and affect almost all construction companies at some level.

There are differences between the way reporting is done under CIS in terms of materials provision and specified supplies. This is explained on the UK Government website

How should the construction industry prepare?

With around 150,000 construction businesses likely to feel the direct impact and additional administrative burden, the FMB insist that this is a critical current issue.

Basic guidelines include:

  • An assessment of current sales and purchases to determine whether your business will be affected.
  • Updating accounting software systems.
  • Train and prepare accounts staff for the changes.
  • Assess the potential cash flow impact.
  • Review any contracts with sub-contractors.
  • Sub-contractors will need to contact clients to ascertain whether reverse charge VAT will apply.

The Government has released guidelines about reverse charge VAT here. The FMB has complained that the guidelines are not user-friendly, and that additional material is needed to help the industry prepare. It has also suggested countrywide workshops and a six-month delay on the rollout of the scheme.

Are you ready for reverse charge VAT?