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Next Steps re VAT Domestic Reverse Charge for the Construction Industry

15 November 2019
Scott Russell
Building & Construction, Accounting & Compliance

The delay in the domestic reverse charge VAT for construction services was welcomed by many in the Construction industry as it has given affected businesses another year to prepare for the changes. The changes have been detailed by us in a previous blog and will have a major impact on the construction industry. If you haven’t heard of the changes then please check out our previous blog.

The new legislation will now be implemented on 1st October 2020 so there is plenty of time to prepare- so no excuses!!!

Here is our plan to ensure you get ready with time to spare!

Between now and 30th June 2020:

  1. Consider what impact the new legislation will have for you. If your supply chain (up and down) is impacted then we recommend that you contact affected suppliers and customers and detail to them the changes. The more information out there the better!
  2. If you are the customer then consider whether the supplies to you are affected by the changes or not. Ultimately it is your responsibility to ensure suppliers invoice you the correct VAT, you cannot recover the VAT if the invoice should be under reverse charge but was issued incorrectly under normal VAT rules! We have drafted three letters, two to suppliers, the first where you are the end user and the supplies are not impacted by the changes and the second where you the contractor notifies the subcontractor that works fall under domestic reverse charge. The third letter is where you are the subcontractor and you are asking for more information about the contract to make a decision as to whether the works fall under domestic reverse charge.
  3. For some businesses with large numbers of active contracts with sub-contractors at a variety of sites, it may be difficult to establish whether the reverse charge applies or not in the run-up to 1 October 2020 and afterwards. For example, on some sites, a construction group may be a property developer and on other sites a building contractor, and on both sites their status could change. To avoid uncertainty and delay to payments whilst each contract is checked, HMRC recognises that it will be easier if one VAT accounting treatment is given to all contracts with a particular sub-contractor. So, if the contractor looks across all construction contracts with a sub-contractor and can see that reverse charge applies to more than 5% of contracts (by volume or value) with that sub-contractor, then the reverse charge may be applied to all the contracts.
  4. Check with your software companies whether your software can deal with the new accounting treatment and that sales invoices for affected services are in the required format. By June next year we would expect all software providers to be ready.
  5. If you are on the flat rate scheme and your sales are under the reverse charge it is highly unlikely that the changes will be beneficial, so start planning for when you need to move off the scheme.
  6. For all other businesses start working out the cashflow impact of the changes. As detailed in our previous article the cashflow impact could be significant, so quantify the amount and start building up cash reserves to cope with the changes or arrange additional funding. For many businesses this will be an opportunity to review credit control systems and improve debt recovery. If you need help on credit control contact us to discuss options.

From 1st July 2020 to 30th September 2020:

  1. If you are affected consider minimising the cash flow impact by invoicing all works up to 30th September promptly. No late invoices!
  2. Consider moving from cash accounting for VAT to invoice accounting in the final quarter, particularly if you have a lot of material purchases on credit and your turnover is impacted by the changes.
  3. If material costs are high and turnover heavily impacted then you may find yourself in a VAT repayment situation. If it makes financial sense consider moving towards monthly VAT return completion.

We have prepared packs for our clients, which include:

  1. A proforma letter detailing the changes to send to your supply chain.
  2. Three letters to suppliers and customers either confirming the VAT treatment or requesting further information.
  3. A selection of frequently asked questions.
  4. Pro forma invoices.
  5. Updated notes from software companies in respect of implementation of the changes.
  6. A video with slides of a course we have carried out for the construction industry.

These packs will be reissued to all our clients early next year but if you want to start early please contact Scott Russell for further details.

The content in this blog is correct as at 15/11/2019. See terms and conditions.

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