The Domestic Reverse Charge for VAT should be delayed, according to two leading industry bodies in the construction sector, The Specialist Engineering Contractors’ (SEC) Group and the National Federation of Builders (NFB).
The NFB, along with a number of other key trade federations, has suggested that the domestic reverse charge for VAT should be delayed until at least April 2020. There is a belief that it will have a far-reaching impact on cash flow and administrative costs across the construction industry, that many companies are not prepared for.
There were more than 3000 insolvencies in the construction industry last year, which is higher than any other UK sector. With the introduction of the reverse charge for VAT and the likely impact it could have on construction cash flow, the figure could potentially grow – Particularly when combined with the likely increase in material costs after Brexit and the continued challenge of late payment from contractors to subcontractors.
The SEC Group, who represents one of the largest sectors of UK construction, has written to the Secretary of State arguing that fair payment should instead be the priority, not reverse charge.
Richard Klein, SEC Group’s CEO said, “A ‘perfect storm’ awaits construction SMEs after BREXIT – late or non-payment, reverse charge VAT and hikes in materials costs. We intend to seek meetings with Nadhim Zahawi and Andrea Leadsom as soon as possible to discuss Business, Energy and Industrial Strategy (BEIS) priorities for payment reform. The re-appointment of Kelly Tolhurst will help ensure continuity in a very critical area of policy as far as construction is concerned. Our priorities now are to reinforce the case for legislation that ring-fences retention monies and mandates the use of project bank accounts for building works over £½ million.”
The construction industry is facing a number of key challenges and, rather than suggesting that the reverse charge be stopped entirely, the NFB argues that simply delaying it would be sufficient in supporting the sector.
Richard Beresford, Chief Executive of the NFB said, ‘For an industry facing lighter workloads, increasing pressure on cash flow and an already high rate of insolvency, reverse charge VAT could not have come at a worse time. By delaying the introduction of this measure, the industry will have more time to properly prepare and make their businesses more resilient, and more detailed guidance can be provided to ensure a smooth introduction”.
What is the VAT domestic reverse charge for building and construction services?
The domestic reverse charge for VAT in the building and construction industry comes into effect from October 2019. It’s an anti-fraud measure which aims to effectively remove the VAT from construction sub-contract supply chains. This means that the customer that is in receipt of the service will have to pay VAT over to HMRC instead of paying it to their supplier.
The changes relating to VAT apply to a supply chain in which payments are required to be reported through the Construction Industry Scheme and makes it impossible for the supplier to avoid paying VAT, typically known as ‘missing trader fraud’.
Missing trader fraud occurs when a trader deliberately avoids paying a VAT liability. It happens when the supply of services are passed through a number of intermediaries before they reach the end-user. These are known as ‘tax loss chains’.
For more information about missing trader fraud, read this.
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