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HMRC has delayed plans to introduce a controversial new VAT system for the construction industry, which had attracted criticism from contractors and accountants alike.
The VAT reverse charge, which was due to be introduced this October, has now been put on hold until 1 October 2020.
In an announcement issued today, HMRC acknowledged that concerns had been raised about the construction sector’s readiness for the changes.
“To help these businesses and give them more time to prepare, the introduction of the reverse charge has been delayed for a period of 12 months until 1 October 2020. This will also avoid the changes coinciding with Brexit,” it said in a statement.
But it added that it was committed to introducing the reverse charge and had already “increased compliance resource”. In the intervening year, it plans to work with the construction sector to raise awareness and provide additional guidance and support to make sure businesses are ready before October 2020.
The reverse charge is a mechanism for accounting for VAT whereby the customer charges themselves VAT, rather than the supplier charging VAT. The domestic reverse charge is commonly used to prevent missing trader fraud i.e. the supplier will charge VAT, be paid the VAT and then ‘go missing’ before they declare it to HMRC. As the reverse charge makes it the customer’s responsibility to account for VAT there is no opportunity for the supplier to disappear without paying the VAT to HMRC.
But subcontractors have warned the new system could push them into negative cashflow, while accountancy giant RSM last month warned that firms were not ready for the changes.
Building Engineering Services Association CEO David Frise welcomed the news, saying: “Common sense has prevailed. If the Government had not delayed the changes, many SMEs would have been caught off guard, facing increased burden and restricted cash flows while simultaneously bracing for the serious disruptions caused by the UK’s planned withdrawal from the European Union on 31 October.
“This gives us plenty of time to help businesses plan a smooth transition in the way VAT is charged by October 2020.”
