Sixteen industry leaders representing thousands of construction companies in the UK have teamed up to request the government delays the VAT reverse charge, which they say could financially ruin small and medium-sized (SME) home builders.
The VAT reverse charge is due to come into effect in October 2020, but has faced criticism for not being promoted enough by the government, and for its prospective impact on tradespeople.
The Federation of Master Builders (FMB), Building Merchants Federation and Construction Leadership Council are among the companies which have signed a letter to chancellor Rishi Sunak.
Construction leaders have warned that following the coronavirus pandemic, which has already hit the economy hard, many construction firms and SME builders lack the financial resources and staff (particularly for companies with furloughed workers) to be able to adhere to administrative requirements of the upcoming VAT changes.
— BMF (@bmf_merchants) May 31, 2020
Around 4,000 construction projects have reportedly been delayed or cancelled due to Covid-19, and construction companies are not in a position to be ready for the impending changes, the letter states.
The FMB, which represents 7,500 SME builders in the UK, says that with many required staff currently on furlough, the pressure on cash-strapped firms could become too overwhelming.
What is the VAT Reverse Charge?
The VAT reverse charge will mean that VAT charges on certain construction services will need to be paid directly to HMRC. Renovators and extenders currently pay these charges to the supplier.
Until now, the subcontractor has accounted for this VAT, and deducted VAT on supply as an input. This means that no net tax is payable to HMRC.
But the construction industry has faced issues with fraud, whereby certain businesses charge VAT for the services they supply, then fail to pay the bill. HMRC has introduced the reverse charge to clamp down on this kind of fraud.
The reverse charge means that it is the customer’s responsibility to account for VAT, so there is no opportunity for the supplier to disappear without paying the VAT to HMRC.
It is due to come into effect in October 2020, having previously been delayed by a year last September, when industry leaders warned that the introduction of the charge could clash with Brexit, and that the new measures would likely squeeze cash flow for SME businesses no longer receiving VAT payments.
The industry chiefs’ letter says delaying VAT reverse charges would help support the wider economic recovery, and have asked for the changes to again be pushed back by at least one year.