Out-Law / Your Daily Need-To-Know

Construction industry 'not prepared' for major UK VAT change

Out-Law News | 06 Aug 2019 | 12:50 pm | 2 min. read

The Federation of Master Builders (FMB) has called for a six month delay to major changes to the way VAT is paid on UK construction services as it says the construction industry is not prepared for the changes.

The FMB set out its concerns in a letter to the Financial Secretary to the Treasury. The Chartered Institute of Taxation (CIOT) has also called for a delay, suggesting 1 April 2020 as a "much more appropriate" date for the new rules to start.

"We believe there will be significant confusion amongst businesses in the early days of the change, undoubtedly leading to disputes between suppliers and customers as to whether or not VAT should be charged. Many businesses will ring HMRC’s phone lines, which will need to be adequately resourced and trained to deal with these queries. At the same time, businesses and HMRC will be dealing with the implementation of Making Tax Digital, as well as the consequences of Brexit," John Barnett of the CIOT said in a letter to HM Revenue & Customs (HMRC).

A VAT 'reverse charge' is due to be introduced in the UK for building and construction services with effect from 1 October 2019. The change means that 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.

The reverse charge is designed to combat VAT fraud in the building and construction sector. It 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.

A survey of around 8,000 SME construction firms carried out by the FMB found that 69% were not aware of the introduction of the reverse charge and 67% of those who were aware said they have not prepared for the changes.

"The new rules will come into force in less than two months' time. Businesses in the construction sector need to ensure that they have the systems and processes in place to cope with the changes," said Richard Croker, a property tax expert at Pinsent Masons, the law firm behind Out-law.com.

The reverse charge will not apply to supplies of construction services made to 'end users'.  An end user will be someone who does not make onward supplies of construction services, such as a business which is occupying a property itself or letting it to others. Intra group supplies and supplies between landlords and tenants will also be excluded from the reverse charge.

"End users will need to make their supplier aware that they have this status so that the reverse charge is not applied. Wording may need to be inserted into contracts to deal with the point," Richard Croker said.

"Contractors who are not end users will need to make sure that they apply the reverse charge and do not pay the VAT to sub-contractors or they could find themselves out of pocket as they will still be on the hook to pay the VAT to HMRC but may struggle to recover amounts improperly paid as input tax, " said Clara Boyd, a VAT disputes expert at Pinsent Masons.

"Many sub-contractors currently rely on the positive cashflow in respect of the VAT element of contract payments which will disappear in relation to reverse charge supplies. Larger construction businesses would be well advised to ensure that their sub-contractors are prepared for the changes, so that they are not surprised when they do not receive the VAT element," Clara Boyd said.

HMRC published guidance on the new rules in June. 

"HMRC could have done much more to prepare the industry for the changes and the action taken so far has not been enough for an industry as large and complex as construction," the FMB said in their letter.