How to address CIS VAT repayment delays?

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HMRC is facing a higher number of repayments under the VAT reverse charge for construction, resulting in some delays.

The Construction Industry Scheme (CIS) VAT Domestic Reverse Charge (DRC) has created significant cash flow issues for sub-contractors. In addition, these companies may also be due repayments from HMRC if they have not paid VAT on their sales invoices.

The domestic reverse charge for building and construction companies came into force earlier this year and changes the way VAT payments are made for VAT-registered businesses. Known as the Construction Industry Scheme (CIS) VAT Domestic Reverse Charge (DRC), it aims to address tax fraud which has been prevalent in the construction sector.

Under the new system which broadly applies to business-to-business transactions and where both parties are VAT-registered, the end-user is now responsible for paying VAT on projects and services directly to HMRC rather than to the supplier.

The basics of the scheme are as follows:

  • The supplier is no longer required to account for VAT and cannot therefore include VAT on their invoices.
  • The end user declares VAT on their tax returns as ‘output VAT tax’ and can claim it back as ‘input tax’.
  • This system prevents ‘missing trader fraud’ whereby a supplier or trader ‘disappears’ after receiving payment from the customer along with the VAT.

But the new system has created significant cash flow issues for sub-contractors. In addition, these companies may also be due repayments from HMRC if they have not paid VAT on their sales invoices.

There have also been reports of delays with VAT repayments from HMRC, creating additional cash flow issues. We spoke to several accountants with clients across the construction and building sector to find out how they’d been affected.

Consider moving to monthly VAT returns if a business expects regular HMRC repayments 

Andrew Norman, VAT Director, Menzies LLP

The introduction of the domestic reverse charge has undoubtedly changed cash flow management for businesses. Those that buy-in labour-only services to make onward supplies of construction services have found that they are now in a VAT repayment position. Although HMRC is normally very reliable when it comes to authorising repayments, there’s no doubt that some repayments will be delayed.

Next steps: There are several steps businesses can take to mitigate these issues:

  • Submit repayment returns ASAP, especially before due date.
  • Ensure repayment claims are justified with supporting documentation.
  • Businesses receiving regular repayments should consider moving to monthly returns rather than receiving quarterly repayments.
  • Businesses should ensure they know their rights: HMRC has to pay a supplement of 5 per cent if a repayment is not processed within 30 days, unless HMRC has already been in contact.
  • Organisations should also consider their cash flow projections and the timing of large purchases: If a purchase falls at the beginning of a VAT quarter, the business must be able to fund the VAT for four to five months before getting the repayment from HMRC.

Verdict: Consider moving to monthly VAT returns if business will require regular HMRC repayments.

Ensure contact details on returns is up-to-date with supporting records easily available

Sarah Hughes, head of VAT, Haines Watts Birmingham

Businesses caught by the introduction of Domestic Reverse Charge Rules now find themselves in a repayment position for VAT. This is resulting in far more enquiries being raised by HMRC before repayments are issued. 

Repayment delays can have a huge impact on businesses, particularly as payment terms with subcontractors can be quite short and so cash flow is essential.  Even where a repayment is authorised by HMRC and they have existing bank details on file, HMRC cannot automatically use these details to issue a repayment. Further delays can then occur with cheques posted out to businesses, which then need to be banked and cleared – it all adds further to the strain on the businesses’ cash flow.

Next steps: We are advising clients to submit VAT returns ASAP, ensure HMRC hold up-to-date contact details and that all records are readily available. For businesses previously caught by the Payments on Account regime for VAT, they must remain within the regime until they have agreed a monthly payment revision or are able to leave the scheme.

Verdict: Ensure details are up-to-date and supporting documentation is accurate and readily available.

Prepare a ‘basket of evidence’ for HMRC if repayments are queried

Richard Staunton, partner and VAT expert, Gerald Edelman LLP

The new domestic reverse charge rules means that certain businesses will be in a VAT refund position where previously they made payments to HMRC. HMRC may be slow to realise that the status of the business has changed and are likely to stop VAT repayments until they make enquiries. Clearly this can have a devastating effect on cash flow.

We generally help our clients prepare a basket of evidence that they can provide to HMRC, so as soon as a repayment return is queried, HMRC receive all the information they need. Delays when VAT returns are queried are normally down to miscommunication which means knowing what HMRC want, and in what format, generally speeds the process up.

Next steps: 

  • Send VAT returns ASAP – ideally the day after the period end, which is normally at least 5 weeks before the return must be submitted.
  • Businesses who expect to be in repayment positions can apply for monthly returns which will reduce cash flow issues by two thirds.
  • If a large repayment is likely, it is sometimes worth sending the information to HMRC at the same time the return is submitted. This means that if it is rejected the information could be on hand to clear it without a formal enquiry being opened.

Verdict: Put together a ‘basket of evidence’ to send to HMRC if repayments are queried. Knowing what HMRC want and need can speed up the process.

Annie Makoff is a freelance journalist and editor.

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