The Federation of Master Builders (FMB) has asked the government to delay bringing changes to VAT that are due to come into force in October.
In a letter to the Financial Secretary to the Treasury, the FMB states that the government has not properly prepared the construction industry for the changes. New data published by the FMB shows that:
- Over two-thirds of construction SMEs (69 per cent) have not even heard of reverse charge VAT; and
- Of those who have, more than two-thirds (67 per cent) have not put prepared for the changes.
This comes after HMRC published guidance on reverse charge VAT just four months before the changes were due to come into place, which has been criticised for being inaccessible to most in the industry and is even contradictory in places. HMRC was also due to have a dedicated website and marketing campaign for the changes to help prepare the hundreds of thousands construction companies who will be impacted by the changes.
Reverse charge VAT will have a serious impact on cash flow, as well as being a significant administrative burden, fundamentally changing the way construction companies invoice their clients and pay their taxes to HMRC.
Brian Berry, chief executive of the FMB, said: “Construction companies are already struggling with Brexit uncertainty, sky rocketing material price rises and skill shortages and reverse charge VAT is yet another thing for them to deal with. What makes things worse is that HMRC has failed to deliver on its promise to help the industry to prepare. The guidance is not user-friendly and even tax experts are scratching their heads over it.
“It’s therefore not surprising that the vast majority of construction SMEs are not aware of the impending changes, despite widespread promotion by the FMB. Small business owners are busy people and clearly they don’t have time to read everything we send them. For those who are aware, they haven’t had a chance to change their systems yet as they were waiting for guidance to be published that has only just emerged. That’s why we are calling on the government to delay the changes by another six months and to use the extra time to improve the guidance and work with us to undertake a more intensive communications campaign. HMRC should also consider holding workshops across the country to explain the changes.”
So what do the changes actually mean and who do they affect?
James Carfell from Collier Roofing explains how it will impact construction businesses:
We are now only a few months away from the domestic reverse charge, taking place on the 1st October 2019, yet the understanding of the implications for the construction industry is still relatively unknown by those who will be affected.
It is perceived that up to 150,000 businesses in the UK will be affected, with the HMRC trying to crack down on millions of pounds fraudulently being lost by missing trader fraud. However, for many small and medium businesses, this could have huge implications on their cashflow. It’s not just about fraudulent actions though, HMRC also wants to cut down on companies charging the wrong VAT amount to customers.
If your company is registered with the Construction Industry Scheme (CIS) then you will 100 per cent be affected and will have to adapt the way you handle VAT from October 2019, including both contractors and sub-contractors who are registered for VAT. However, it is important to understand it isn’t just those in construction, as it will also affect companies in repair, air conditioning, painting, alteration, civil engineering and decorating. The one exception is for zero rated projects, which are exempt from the reverse charge. Of course, I strongly recommend you go through the government guidelines on who will be affected, or you can use their breakdown service to understand if you are looped in.
The date on the VAT invoice or receipt of payment will affect whether it falls before or after the reverse charge. If it falls beforehand then you simply follow the current VAT rules.
When you issue an invoice, unless your client is the end-user or owner of the project, you will no longer be charging the VAT to the client (you do still show the VAT amount). However it is worth highlighting on the invoice that the sale comes under the domestic reverse charge. It then falls on the customer work out the VAT and to declare it. If you do not know what to write on the invoice, the HMRC have provided some general guidance, such as ‘Reverse charge: Customer Is To Pay VAT To HMRC’.
The biggest factor you have to consider is whether your accounting system is updated for this change. You will need to review any supplies which are made between VAT contractors to see whether they are affected by these changes.
But most importantly for your business, you need to count this into your cashflow and ensure you are ready for this sudden change.