Construction VAT reverse charge delayed again to March 2021

"The delay to the new rules is welcome as construction businesses would struggle to cope with such a major change whilst dealing with the effects of the coronavirus pandemic," said Clara Boyd a tax expert at Pinsent Masons, the law firm behind Out-Law.

"However, businesses which have not already taken steps to ensure their accounting systems and software can cope with the change should use this delay to get up to speed with the new regime," Boyd said.

The reverse charge is an anti-fraud measure which prevents the supplier from charging what purports to be VAT to the customer, but then absconding with the VAT element and not paying it over to HMRC.

When the reverse charge comes into force, a customer within the construction industry receiving the supply of construction services will have to pay the VAT direct to HMRC rather than paying it to the supplier. It will have a significant impact on VAT compliance and cash flow.

This marks the second delay to the introduction of the rules. They were originally due to come into force in October 2019, but were first delayed until October 2020, because the construction industry was not sufficiently prepared for the changes.

Supplies made to 'end users', supplies between connected parties and supplies between landlords and tenants will all be excluded from the new rules.

At the same time as announcing the delay, HMRC has also announced that the reverse charge legislation will be amended so that businesses will only be excluded from the reverse charge as end users or intermediary suppliers, if they have informed their sub-contractors in writing of this fact.

"Notwithstanding the delay, construction contracts being entered into now need to cater for the reverse charge, given that they will be likely to involve construction services being supplied once the new regime comes into force in March. These contracts will need to include warranties as to end user status," said Andrew McCarthy, a property tax expert at Pinsent Masons.

In its brief announcing the delay, HMRC warned that it remains committed to the introduction of the reverse charge and has put in place "a robust compliance strategy for tackling fraud in the construction sector using tried and tested compliance tools". It said that in the period before the rules come into force it will continue to focus additional resource on identifying and tackling perpetrators of fraud in the construction sector.

Once the domestic reverse charge is in force, a VAT registered business receiving supplies of construction services from another VAT registered business where the reverse charge applies will have to account for the reverse charge VAT on its own VAT return and will be able to recover that VAT on the same VAT return, subject to the normal VAT recovery rules. Where the reverse charge applies, a business will need to ensure that it does not pay over the VAT element to the supplier, as it will still be liable to account for the VAT to HMRC.

The domestic reverse charge will have a significant impact on VAT compliance and cash flow management for the businesses involved. New systems and processes will need to be introduced or current systems and processes will need to be amended in order for businesses to be able to implement the new rules.

Smaller sub-contractors may currently rely on the positive cash flow in respect of the VAT element of contract payments which will disappear in relation to reverse charge supplies.