CIOT welcomes delay to VAT change because of COVID-19

The Chartered Institute of Taxation (CIOT) welcomes that construction businesses will get an extra five months to prepare for a major change in accounting for VAT, because of the impact of COVID-19.1 Without a delay there was a risk this major tax change risks hitting SMEs the hardest at a time when they need to protect jobs and livelihoods.

The new rules mark a complete overhaul of the way VAT is payable on building and construction invoices, as part of moves to reduce fraud in the sector. Under the domestic reverse charge the customer receiving the service will have to declare the VAT to HMRC in its own VAT return instead of paying the supplier. The changes only apply to supplies of building or construction services made to or received by businesses registered for UK VAT, where such a supply must be reported through the Construction Industry Scheme (CIS). Hence, it will not apply to consumers or businesses customers not meeting the reporting criteria.

HMRC announced late last week (5 June) that the introduction of the domestic reverse VAT charge for construction services has changed from 1 October 2020 to 1 March 2021.

HMRC had already pushed back the original start date of 1 October 2019 by a year, to give businesses more time to prepare. The CIOT welcomed this first delay, believing there was substantial evidence of a lack of awareness of this change, and a lack of preparedness even among those businesses who were aware of it.

Commenting on the latest extension, Linda Skilbeck, Vice Chair of the CIOT’s Indirect Taxes Committee, said:

“We recognise that it is extremely difficult for the Treasury and HMRC to achieve the right balance between maintaining ‘business as usual’, while also supporting businesses through this difficult period with COVID-19.

“We welcome the further delay to the implementation of the domestic reverse charge for construction services to 1 March 2021 because of the many unexpected pressures caused by the pandemic and the lockdown on construction businesses, of which a significant proportion are SMEs. The cash flow effect of the domestic reverse charge will be significant, and this is compounded by the added effect of reduced business activity due to COVID-19 restrictions.

“The change to the legislation to clarify the position as to when the reverse charge applies should also lessen the chance of disputes between suppliers and customers as to which party in the supply chain should be accounting for VAT.

“We hope HMRC will work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses are ready for the new implementation date.”

Activity in construction has dropped significantly due to COVID-19. It is likely that firms that have accessed emergency finance through Government-backed schemes will be diverting their profits to pay back these loans. They will therefore struggle to accumulate the working capital necessary to mitigate the impact on cash flow of reverse charge VAT. The impact on cash flow is especially problematic for firms purchasing high value materials that are VAT-rated, but delivering construction services subject to reverse charge VAT.

Notes for editors

1. Domestic reverse VAT Charge for building and construction services, HMRC, 5 June 2020