With the dust barely settled from Making Tax Digital, it’s time to turn our attention to HMRC’s next big change. From 1st October 2020 significant changes are being introduced to the VAT treatment of suppliers within the construction industry.
These changes are designed to prevent fraud where suppliers charge and collect VAT without handing it over to HMRC.
What is changing?
Customers rather than suppliers will need to account for VAT. These changes won’t come as a shock to most as the construction industry is renowned for VAT fraud.
Post new rules, certain customers/contractors will be liable to account to HMRC for VAT in respect of those purchases rather than the supplier (the ‘reverse charge’). Currently a subcontractor is responsible for charging VAT to HMRC on supplies to main contractors. An equivalent VAT deduction can also be claimed by the main contractor subject to the normal rules of VAT recovery.
There is a planned 3 month transition period where contractors can still pay invoices with VAT dated before 1st October on the current VAT rules, and the same is true of payment for works Certified before 1st October.
How will this affect you
There has been concern over how this will affect the cash flow of some construction businesses, with one company alreading ceasing trading and blaming VAT changes. However HMRC state the changes will help level the playing field for businesses by ensuring that VAT fraud is removed from supply chains.
It’s important to understand how the new rules might impact on your business operation, and with up to 150,000 businesses expected to be affected, this is highly likely.
The impact on business administrative burdens is forecasted to be significant. However, the HMRC state as a result of the technical consultation, the legislation has been simplified to make the reverse charge only apply where the payment for the supply needs to be reported for CIS purposes.
What you need to do
All businesses involved in the construction industry should review their supply chains to consider how they will be impacted by the changes. It is important to identify the categories of supplies which may be subject to the new “reverse charge” rules and update accounting systems accordingly.
Some businesses may also see significant variation in cash flow, as they will no longer be able to use VAT collected from customers as working capital before paying it on to HMRC. The impact on timeframes, invoicing, contracts and working capital of the suppliers should also be considered.
It is also recommended that businesses contact their own subcontractors to make them aware of the changes.
- Review any supplies made to and received from VAT registered contractors - decide whether these will be subject to the new reverse charge from October 2020
- Get notification from customers that they are an end user along with confirmation of their VAT registration and CIS status
- Think about any adaptation you will need to make to accounting systems - our customers can be confident that we will be rolling out updates to our software in due course
- Think about the implications this will likely have on cash flow and decide if there are way to mitigate this
Where you can hear more about this
If you’re an Integrity Software customer, we will be releasing an update to all of our UK VAT registered customers containing changes to the Subcontract and Sales Ledgers, and VAT Returns / Reporting.
You can also find full details on HMRC’s website.
Book your place on an event
We will be explaining the changes and discussing how this could affect you in much greater detail at our customer events. Registration is free - book your place now to avoid disappointment.
It is likely that if you’re in the construction industry, your business will in some way impacted by these changes. You should consult your cash flow and make sure your accounting system is ready for the impending changes.