VAT Domestic Reverse Charge Delayed until March 21

An industry under pressure

The coronavirus pandemic has left the world in economic uncertainty, with the construction sector among those affected. In a recent survey of more than 4,000 businesses by Constructionline, 87% felt they had been directly impacted and as many as 38% felt they may run into financial difficulties as a consequence. 

In April we asked the question, “Should the VAT Domestic Reverse Charge be Delayed?”, citing a range of fundamental challenges the industry was and still is facing in the midst of the pandemic. 

From potential legal challenges as a result of delays on contracts and the application of the ‘force majeure’ clause, right through to the far-reaching cashflow implications the pandemic could have, construction businesses are certainly feeling the pinch.

Businesses are now deep into the process of devising and implementing new ways of working in accordance with social distancing measures, which of course is important from a safety perspective, but presents its own unique challenges in terms of output and productivity. 

We felt at the time that the introduction of the VAT Domestic Reverse Charge could be catastrophic for an industry already under pressure.

At the IN-SYNC Group, we believed that introducing a 12-month delay could “give construction firms the opportunity to take stock, re-evaluate the businesses and tackle the changes they need to make in the right way”. We also suggested that, “Failure to do so could cause many construction businesses to fold as they struggle to balance the books”. 

HMRC announces delay

HMRC has announced that the Domestic Reverse Charge for VAT will be delayed for five months in light of the coronavirus pandemic and its impact on the industry. 

The new start date has been moved from October 1st, 2020 to March 1st, 2021. 

An additional amendment has also been announced to the original legislation, which means that in order to be classed as an end-user or intermediary supplier, you must notify any sub-contractors in writing to avoid any confusion as to who is excluded from the reverse charge.  

HMRC is introducing the VAT domestic reverse charge in a bid to combat what’s known as, ‘missing-trader fraud’. This is when suppliers charge customers VAT and then shut up shop before paying it over to HMRC. 

The reverse charge system means that only the main contractor will collect VAT from the client and pass it on to HMRC, which could have a short-term impact on cashflow for subcontractors.