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Earlier this month the government held off on their proposals to implement new VAT rules for the building and construction sector. However, this was merely a postponement of the new ruling rather than a U-turn. This means that from 1 October 2020, construction companies will be subject to new rules on how they handle and manage VAT.

What is the VAT domestic reverse charge?

The new regulations, known officially as the ‘VAT domestic reverse charge for building and construction’, will affect a variety of construction services including the purchase of materials used as a direct part of the fulfilment of those services.

In simple terms, the VAT domestic reverse charge can be seen as an extension of the Construction Industry Scheme (CIS), affecting transactions undertaken between VAT-registered contractors and sub-contractors who are CIS registered.

What changes will come into force with the new rules?

The new regulations will shift the onus of accounting for VAT away from suppliers and onto customers. This means responsibility for accounting for VAT will be with the contractors who will account for this as though they supplied the service themselves. Simply put, sub-contractors will no longer need to account for VAT directly as this will be done by the contractor.

This is expected to negatively impact the cash flow of some sub-contractors who will no longer be in receipt of VAT payments from customers. It is therefore vital that those who are concerned about this, utilise the additional time granted before these regulations come into force to scrutinise their financial position and put plans in order to lessen the fallout. This could involve reassessing how incomings and outgoings are managed, or exploring whether an injection of capital is going to be required to ease the transition.

"The new regulations, known officially as the ‘VAT domestic reverse charge for building and construction’, will affect a variety of construction services including the purchase of materials used as a direct part of the fulfilment of those services."

What is the purpose of the VAT domestic reverse charge?

The introduction of the VAT domestic reverse charge is one of a series of measures to increase the funds collected by HMRC by catching those looking to avoid fulfilling their tax obligations. The new rulings reduce the disclosure risk when it comes to VAT owed to HMRC thereby limiting the opportunity for fraud or theft.

What has caused the delay?

HMRC made the decision to delay the implementation of the new regulations citing a lack of awareness of the changes, along with a desire to ensure businesses were adequately prepared. The delay not only serves to give businesses more time to adapt to the new rulings but it also prevents further confusion at a time when Britain is on the cusp of exiting the EU.

What happens to those who were ready for the new rules?

While the delay will be a welcome relief to some; for others who have already made preparations in anticipation of the rulings coming into force in October 2019, the postponement could be extremely inconvenient. In particular any sub-contractors who have already completed the process of moving over to monthly returns will now be in the position of needing to reverse this as a matter of urgency. Failure to do this could lead to sub-contractors experiencing cash flow problems when HMRC come to collect the VAT. HMRC have acknowledged that some sub-contractors will be negatively affected by their well-placed desire to get ahead of the changes and have promised to help negate any issues resulting from this as much as possible.

In a 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.”

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