As a construction industry business, you will probably have been preparing to adhere to the Domestic Reverse Charge VAT legislation from October 2020, however as we announced recently, the date has been postponed again, and HMRC have now confirmed that the new law will be effective from 1st March 2021. This date is very close to the 31st March 2021 deadline for paying any deferred VAT for the period 20th March to 30th June 2020. We provide solutions to the potential cashflow implications detailed below.
WHAT IS THE DOMESTIC REVERSE CHARGE VAT?
As a brief reminder, the new rules will apply throughout the supply chain to any B2B construction supplies, shifting the VAT responsibility to the final customer or ‘End User’ to combat fraud and prevent the exploitation and avoidance of VAT payments by sub-contractors and construction workers within the construction industry. The Reverse Charge essentially means that all subcontractors, construction workers and small businesses within the sector will need to make major changes to the way they account for and report their VAT payments, and customers will need to deal with the VAT on their own returns.
You’ll need to start identifying which supplies to your customers or contractors are liable for the Reverse Charge. This will include checking VAT registration and providing evidence that the customer is the ‘End User’ and then invoicing correctly according to the new rules.
HOW COULD THE NEW IMPLEMENTATION DATE AFFECT ME?
Thousands of businesses and self-employed workers have had their cashflow negatively impacted by the recent Coronavirus outbreak. To assist in this situation, the Chancellor had allowed the deferment of VAT payments for the period 20th March to 30th June 2020, to be paid in arrears by 31st March 2021 – just 30 days after the implementation date of the Reverse Charge.
If you submit quarterly VAT returns, this will more than likely have a huge impact on your cashflow – for example, if you issue an invoice to a construction worker for £50,000 on 31 March 2021, you will no longer charge £10,000 VAT which you would probably collect in April 2021 but not pay to HMRC until 7 August 2021 - the payment date for your June 2021 VAT return if you use the cash accounting scheme.
CONSIDERATIONS TO HELP EASE POTENTIAL CASHFLOW ISSUES
With the deadline being just over 5 months away, you can start planning for the impact now by considering the following advice:
- Allow additional time and costs: you may need to update your IT and invoicing systems and invest in training for staff members.
- Look at changing your accounting processes to submit monthly VAT returns rather than quarterly to accelerate input tax recovery on your expenses. If applicable, you may want to consider withdrawing from the flat rate scheme, however you must notify HMRC of your intention to withdraw from the flat rate scheme in writing.
- Cash accounting scheme withdrawal: if you have little or no output tax to declare it might also be sensible to withdraw from the cash accounting scheme to speed up input tax recovery (to the date of the purchase invoice), as input tax can only be claimed by scheme users when suppliers are paid. You will not be able to re-join the scheme for twelve months, and you will need to ensure the requirements of the scheme are met if and when you do rejoin.
At LWA, we have written a series of advisory blogs explaining what the Domestic Reverse Charge is; why it will become law; which services will be affected; and an easy-to-follow flow chart showing if and how you need to do to comply. Visit our blog and search ‘Property’ to find out more, however please note, the date to comply has been changed to 1st March 2021.
You can read the full document from HMRC by clicking here.
Please contact the LWA Tax team in Warrington on 01925 830 830 or call our South Manchester office on 0161 905 1801 if you need to speak to us about cashflow management as a result of the new Domestic Reverse Charge VAT implementation date, or to help your business get back on track as a result of the Covid-19 virus impact.