VAT reverse charge delayed until 2020

In a move welcomed by many in the construction sector, the Government has announced that the introduction of a VAT domestic reverse charge will be delayed until 1st October 2020.

A short briefing on gov.uk explained that industry representatives had “raised concerns” that many businesses in the construction sector were not ready to implement the changes on the planned date of 1st October 2019, and this delay will help them prepare.

VAT domestic reverse charge – background

The intention to introduce a domestic reverse charge for construction services was announced in 2017. It shifts responsibility for accounting for the VAT on certain “specified services” from the supplier to the recipient of the services.

The measure is intended to prevent “missing trader” VAT fraud in construction supply chains. This is where fraudsters set up shell companies to steal VAT while operating alongside legit construction firms.

The reverse charge is expected to bring millions in missing VAT into the Exchequer.
Effectively it means that businesses who are caught by the domestic reverse charge will no longer charge VAT on their invoices, as the recipient business will charge themselves the VAT.

“Sensible and pragmatic decision”

The Government’s decision to delay the domestic reverse charge was hailed by the Federation of Master Builders as “sensible and pragmatic”. Its CEO, Brian Berry, stressed that the focus now must be on communication and guidance to help construction businesses prepare.

He said: “It is reassuring that the Government has listened to the construction industry, which has come together to make clear to the Government that sticking to the October 2019 timetable could lead to loss of productivity, reduced cash flow and in the worst cases, lead to a hit on jobs, tipping some companies over the edge. What’s required now is for the Government and industry to deliver a sector-wide communications campaign, which must include plain English guidance on the changes.”

Employment businesses out of scope

It had already come to light that employment businesses supplying construction workers aren’t likely to be considered as a building and construction service for VAT purposes, and therefore wouldn’t be subject to the reverse charge, with HMRC guidance stating:

“Employment businesses who supply staff and who are responsible for paying the temporary workers they supply are not subject to the reverse charge”.

Nevertheless employment businesses will need to review their contractual arrangements where necessary to avoid being inadvertently caught by the reverse charge. The extra year in implementation now gives agencies breathing room to do that.