HMRC delays reverse VAT charge until March 2021

HMRC has announced a second delay to the introduction of the domestic reverse charge for construction services due to the impact of the coronavirus.

The scheme was due to come in on 1 October, but it will now be delayed for a further 5 months until 1 March 2021.

The decision to delay follows strong lobbying of the Government by the construction industry.

Leading trade bodies in construction wrote to Chancellor Rishi Sunak last week urging a further delay to the scheme. The letter was signed by the Construction Leadership Council, Federation of Master Builders, Build UK and the Construction Products Association.

The letter claimed:

  • 39% of construction companies are not aware of reverse charge VAT.
  • 36% haven’t taken steps to prepare.
  • 30% have not discussed the requirements with their accountant.

Despite this level of unpreparedness, HMRC did not agree to their request of a 12-month deferral.

The scheme is a means of collecting £500 million of tax per annum that is currently being lost. HMRC, therefore, remains eager to introduce the scheme as soon as possible and has therefore opted to introduce the scheme from next March.

HMRC commented:

“To help these businesses overcome the effects that the coronavirus pandemic has had on them and give them more time to prepare, the introduction of the reverse charge has been delayed for a period of 5 months until 1 March 2021.”

Background

A domestic reverse charge means the UK customer who gets supplies of construction services must account for the VAT due on these supplies on their VAT return, rather than the UK supplier.

This removes the scope for fraudsters to steal the VAT due to HMRC and follows similar measures introduced in response to criminal threats for mobile telephones, computer chips, emissions allowances, gas and electricity, telecommunication services and renewable energy certificates.

HMRC says that it “remains committed to the introduction of the reverse charge” as a means of tackling fraud.

During the delay, HMRC will “focus additional resource on identifying and tackling existing perpetrators of the fraud.” It will also work with the construction industry to raise awareness levels ready for the new implementation date.

Accountants should use the grace period to communicate proactively with their construction clients about the scheme and how it could change the nature of their cash flow.

Further reading:

David Nunn is Content Manager at AAT.

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