VAT: Construction industry reverse charge delayed again
The domestic reverse charge for the construction industry has been delayed once again by five months to 1 March 2021. Neil Warren explains the implications of this surprise move.
On Thursday 28 May, HMRC’s press office confirmed that the new domestic reverse charge rules for the construction industry would commence on 1 October 2020. But just a week later, HMRC announced that the introduction would be delayed until 1 March 2021.
I am very impressed with how quickly decisions are being made on so many tax and business issues to help businesses survive and hopefully prosper in these difficult times. The five-month delay is both welcome and sensible, one less thing for builders to worry about. But what does it mean for our clients?
Here are four key issues to consider:
1. Cash flow challenges
My concern with the new start date is that it is very close to 31 March 2021, which is the deadline set for paying the VAT arrears deferred during the VAT payment holiday between 20 March and 30 June 2020. This creates potential cash flow issues.
Bob is a subcontractor builder working for main contractors on commercial projects, which means his business will be affected by the new reverse charge rules. He uses the cash accounting scheme on his VAT returns, which are completed on a calendar quarter basis. He invoiced two big jobs as follows:
31 December 2020: £40,000 plus £8,000 VAT. The sum of £48,000 was paid by his customer on 14 January 2021.
31 March 2021: £50,000 no VAT – paid by his customer on 14 April 2021. Output tax of £10,000 will be accounted for in Box 1 of the customer’s VAT return instead under the new reverse charge rules and not paid to Bob.
Bob’s cash flow will be boosted by £8,000 VAT between 14 January 2021 and 7 May 2021 – ie the period between when his customer pays the VAT on his December sales invoice and the payment date for his March 2021 VAT return.
But the potential cash flow boost of £10,000 between 14 April and 7 August 2021 is lost on the March invoice for £50,000. This working capital loss comes just 14 days after Bob had to settle the arrears on his March 2020 VAT return that he delayed paying during the Covid-19 holiday payment window. This means his business has suffered two big cash flow VAT hits in a short period of time.
It is important that builder clients are aware of this potential double strike to their cashflow.
Possible solutions might be to encourage banks to provide an increased overdraft facility or to encourage the VAT deferred in the holiday period to be paid back in stages by clients before the 31 March deadline, if profits and working capital allows. A softening of the double blow, so to speak.
2. Diary entry
This is the second deferment to the new reverse charge rules. The first deferment from 1 October 2019 to 1 October 2020 was largely caused by the confusion and uncertainty of Brexit. Many clients and advisers also found the reverse charge rules difficult to grasp.
It might be worth making a diary entry for 1 December 2020 to start liaising with clients three months ahead of the new 1 March date. I would have suggested early in January 2021 but there are other things going on in that madhouse tax month.
The problem is that postponing this issue until after 31 January 2021 will be too close to 1 March.
3. Monthly VAT returns
If all or most of your client’s income will be subject to the reverse charge, they will be VAT repayment traders – with input tax to claim on materials and overheads but very little or no output tax to pay.
In that case it makes sense to submit monthly rather than quarterly VAT returns after 1 March 2021, to accelerate input tax recovery, assuming the amounts to claim are worthwhile.
4. Flat rate and cash accounting schemes
Another action point for builders is to leave the flat rate scheme, although I suspect it is not used by many builders anyway. It will also make sense to leave the cash accounting scheme in many cases, so that input tax can be claimed on the date the purchase invoice is received from suppliers instead of the payment date.
I would have liked to see the new rules delayed by 12 months. This would have avoided the double-trouble of bunched payments in the spring and also the introduction date being so close to the self-assessment deadline. But the five-month delay is very welcome indeed.