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Reverse charge VAT for the construction industry (domestic reverse VAT charge). Will this ever be implemented?

If you are in the construction industry you may have heard about the introduction of reverse charge VAT, which was originally supposed to be implemented on the 1st October 2019. This was delayed by a year to October 2020 due to the industry not being ready and now delayed again due to Covid 19.

The latest update is the changes will take place from the 1st March 2021. Let us have a quick look at these changes and why they are being introduced.

What is the point of these changes?

Put simply there are two main reasons for the change, which are:
1- speed up payments of tax to the Exchequer, and
2 – to reduce fraud.

Under the current system suppliers charge customers VAT, then normally on a quarterly basis pay the Vat collected to HMRC. This helps suppliers with cashflow but adds delay to when the tax is paid to the Exchequer.

The current system also allows unscrupulous suppliers to charge customers VAT but not actually account for VAT to HMRC. Estimated to lose £100m each year.

Who will this apply to?

It will apply to transactions between VAT registered contractors and subcontractors who are registered for Construction Industry Scheme. It will not apply to the end user or intermediary supplier. There are also many trades which are exempt form this, details can be found on HMRC website.

How can you prepare?

We recommend you familiarise yourself with the changes. The best place to start is the HMRC website.

Make sure your software can handle reverse charges transactions.

Make sure your customers and suppliers are aware of the changes.

Think about how the changes may affect your cashflow. Some businesses may find themselves in a VAT refund position and may benefit to charging to monthly VAT returns. If you are struggling to submit quarterly returns and now need to submit monthly, then maybe it is time to review how you work.  Contact us and see how we can help.