COVID-19

Should the VAT Domestic Reverse Charge be delayed in the wake of COVID-19?

The coronavirus crisis has thrown the UK economy into disarray. Construction, like many sectors, has been hit hard.

Despite the announcement of government support to help businesses get through the pandemic, many fear that cashflow issues could still send construction businesses under.

With the Domestic Reverse Charge for VAT due to be introduced in October 2020, after having been deferred for 12 months, it could cause a perfect storm which could be devastating for UK construction firms.

Should the VAT Domestic Reverse Charge be delayed in the wake of COVID-19?

COVID-19 in the Construction Sector

The outbreak of COVID-19 has and will continue to have an unavoidable impact on many businesses within the construction sector, particularly SMEs.

Despite the government’s sector-specific guidance on social distancing, the worldwide lockdown has caused a number of other challenges that will need to be tackled in the months to come.

Some of the more pressing and immediate concerns involve opening up supply chains, maintaining the supply of materials and managing workforces through this lockdown. Failure to keep on top of any of these issues will impact project delivery and cause delays.

Such delays could lead to longer-term concerns and challenges. For example, failure to meet agreed deadlines could trigger legal challenges as a result of disputes between clients and contractors.

In particular, the focus is likely to be around the subject of ‘force majeure’, a contractual clause which allows businesses to adjust terms in extraordinary circumstances beyond their control.

Even if the client does agree to force majeure, it will not allow contractors to recover the increase in their preliminary costs when the contract completion date extension has been agreed. This is still likely to cause challenges further down the line. 

Cashflow implications

UK construction businesses are anxiously waiting on the Government’s support in response to coronavirus – specifically the Self-employed Income Support Scheme and the Coronavirus Job Retention Scheme.

The National Federation of Builders (NFB) has warned of an impending cash flow crisis if the Government doesn’t make payments swiftly to UK construction employers.

Whilst the launch of the online claims services for the coronavirus job retention scheme on April 20 shows that headway is definitely being made, many smaller firms are concerned that the cashflow impact of paying furloughed employees could be enough to put them under.

Add this pressure to pay operatives to the longstanding issue of late payment in the industry, supply chain challenges and the potential for litigation, and you’ll start to see all the ingredients to an increasingly precarious situation for the sector.

 

Domestic Reverse Charge in Construction

It’s clear the construction sector clearly already has plenty of challenges to contend with this year. However, looming in the not-too-distant-future is another significant change to the industry. The introduction of the VAT Domestic Reverse Charge could cause serious issues if construction businesses aren’t prepared for it.

The Domestic Reverse Charge completely changes the way that VAT is handled in the construction sector. It’s an anti-fraud measure with the purpose of effectively removing VAT from construction sub-contract supply chains. As a result, any customers that are in receipt of service will be expected to pay over any VAT to HMRC instead of to their supplier.

The measure is being introduced as a method of combatting ‘Missing trader fraud’, which occurs when a trader deliberately avoids paying a VAT liability. This usually happens when the supply of services are passed through several intermediaries before they reach the end-user. These are known as ‘tax loss chains’.

The Domestic Reverse Charge had been due to be introduced in October 2019, but the Government announced a 12-month delay following concerns from industry representatives. These representatives suggested that UK construction businesses just weren’t in a position to implement the changes, particularly whilst Brexit took place.

 

The question: Can the VAT Domestic Reverse Charge in Construction happen in 2020?

Many construction businesses in the UK are still woefully underprepared for the Domestic Reverse Charge. Having already had such a challenging year in respect of cash flow, suppliers will be subject to VAT on their own costs, without the ability to pass it on to their customers.

Contractors need to understand the implications of the reverse charge and ensure they’re adequately prepared for it. With all eyes on the COVID-19 crisis, it’s unlikely that many contractors have even given it a second thought as, just like the majority of businesses across the UK, they’re more focused on survival rather than procedural change.

Given that the Government has already delayed the introduction of the controversial IR35 reforms in light of the COVID-19 crisis, it seems reasonable to suggest that a delay to the Domestic Reverse Charge is a potential option.

Introducing such a delay to the Domestic Reverse Charge would allow time for the dust to settle in the wake of this pandemic, giving construction firms the opportunity to take stock, re-evaluate their businesses and tackle the changes they need to make in the right way.

Failure to do so could cause many construction businesses to fold as they struggle to balance the books in line with all of the other challenges they’ve had to face this year, which could have far reaching consequences in a sector the UK relies upon so heavily.

 

What do you think? Should the Domestic Reverse Charge go ahead this year? Let us know.

 

 

VAT Domestic Reverse Charge Delayed until March 21

16 June 2020

A 12-month delay has been announced by the Government for the UK-wide rollout of the new VAT domestic reverse charge within the construction industry. The reverse charge had been set to come into force on October 1st, 2020.


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