Last updated: 5 June 2020
The domestic reverse charge (referred to as the reverse charge) is a major change to the way VAT is collected in the building and construction industry, which means the customer receiving the service will be required to pay the VAT due to HMRC, instead of paying the supplier.
It will apply to individuals or businesses registered for VAT in the UK, but not to services supplied to consumers, nor to certain customers who are “end users” or “intermediary” suppliers, where the usual VAT rules apply. The reverse charge will only affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS).
Why is it delayed?
A coalition of construction industry representatives had raised concerns that many businesses in the construction sector would not be ready to implement the VAT domestic reverse charge by 1 October 2019, due to the effect of the virus on activity and cash flow. The reverse charge itself will also negatively affect cash flow, because VAT will no longer be collected by suppliers and paid to HMRC at a later date. In addition, many construction businesses have restricted capacity to implement the necessary software and accounting changes due to furloughed staff.
To help the sector and allow more time to prepare, the introduction of the reverse charge has been delayed for a further 5 months until 1 March 2021.
Click here to see Linda's comments on the extension, published by The Chartered Institute of Taxation.
What should you do?
HMRC Business Brief 7 (2020) explains the delay and also that there will be an amendment to the legislation.
This amendment will make it a requirement that in order for businesses to be excluded from the reverse charge because they are end users or intermediary suppliers, they must inform their sub-contractors in writing. This will make it clear whether a supply is excluded from the reverse charge, and therefore which party is responsible for paying VAT to HMRC.
The legislative change will bring certainty for contractors, and had been lobbied for by many commentators because of the potential for disputes where a contractor applied the reverse charge but the customer had failed to declare end user/intermediary status. The HMRC guidance on the reverse charge is here.
Last updated: 5 June 2020
The domestic reverse charge (referred to as the reverse charge) is a major change to the way VAT is collected in the building and construction industry, which means the customer receiving the service will be required to pay the VAT due to HMRC, instead of paying the supplier.
It will apply to individuals or businesses registered for VAT in the UK, but not to services supplied to consumers, nor to certain customers who are “end users” or “intermediary” suppliers, where the usual VAT rules apply. The reverse charge will only affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS).
Why is it delayed?
A coalition of construction industry representatives had raised concerns that many businesses in the construction sector would not be ready to implement the VAT domestic reverse charge by 1 October 2019, due to the effect of the virus on activity and cash flow. The reverse charge itself will also negatively affect cash flow, because VAT will no longer be collected by suppliers and paid to HMRC at a later date. In addition, many construction businesses have restricted capacity to implement the necessary software and accounting changes due to furloughed staff.
To help the sector and allow more time to prepare, the introduction of the reverse charge has been delayed for a further 5 months until 1 March 2021.
Click here to see Linda's comments on the extension, published by The Chartered Institute of Taxation.
What should you do?
HMRC Business Brief 7 (2020) explains the delay and also that there will be an amendment to the legislation.
This amendment will make it a requirement that in order for businesses to be excluded from the reverse charge because they are end users or intermediary suppliers, they must inform their sub-contractors in writing. This will make it clear whether a supply is excluded from the reverse charge, and therefore which party is responsible for paying VAT to HMRC.
The legislative change will bring certainty for contractors, and had been lobbied for by many commentators because of the potential for disputes where a contractor applied the reverse charge but the customer had failed to declare end user/intermediary status. The HMRC guidance on the reverse charge is here.
VAT consultancy for businesses
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28 May 2020
