A 12-month delay to the introduction of the domestic reverse charge VAT for construction services has been announced by the government.
The construction VAT reverse charge had been due to come into effect on 1 October 2019, but the delay until 1 October 2020 gives renovators and extenders more time to prepare.
The construction industry has been intensely lobbying for this delay, warning that awareness of the change was not widespread enough. Of particular concern to industry representatives was that the reverse charge could have a disruptive impact on cash flow to contractors.
In August a coalition of construction associations wrote to Sajid Javid, the chancellor of the exchequer, requesting a six-month delay to the introduction of the reverse charge. Mr Javid has permitted double this time in order for the construction industry to prepare, which also ensures that the reverse charge does not clash with Brexit.
What is the VAT Reverse Charge?
The VAT reverse charge is quite complicated, but at its most simple level means that renovators and extenders who receive the supply of construction services must pay VAT to the HMRC rather than the supplier.
This is being called the reverse charge because, in turn, a contractor would deduct the VAT on the supply as an input. This means that no net tax is payable to HMRC. Previously, it was often the subcontractor who had to account for the VAT due.
Now that the delay has been announced, renovators and extenders who may have been caught off guard by the reverse charge are now able to prepare for and understand the charge in greater detail before it is introduced next year.
Reaction to the Delay
The news has received positive reactions from industry leaders and VAT experts, which has been described by Nigel Roberts, VAT Director and Head of VAT & Duty, as “great news for the construction sector”.
Mr Roberts added: “The reverse charge rules are extremely complicated and many of the business affected were unaware that they were due to start in less than a month or the impact they would have on working capital and accounting systems.”
HM Revenue & Customs said in a briefing note: “Industry representatives have raised concerns that some businesses in the construction sector are not ready to implement the VAT domestic reverse charge for building and construction on 1st October 2019.
“To help these businesses and give them more time to prepare, the introduction of the reverse charge has been delayed for a period of 12 months until 1st October 2020.”