Builders call for reverse charge delay amid ‘construction chaos’ claims

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The largest trade association in the UK construction industry has called on the government to put October’s VAT reverse charge on ice following news that two-thirds of small builders have not even heard of the plans.

In a letter to financial secretary to the Treasury Jesse Norman, the Federation of Master Builders (FMB) chair Brian Berry has expressed serious concerns about the government’s plans to make changes to the way VAT is collected in the building and construction industry.

Berry went on to state that unless the government delayed topping out the rules, it could lead to a spike in company insolvencies and ‘construction chaos’.

Lack of awareness

Underpinning the association’s worries is new research undertaken by the body regarding awareness of the new rules that are due to come into force in October 2019.

A survey of the body’s 8,000 small and medium-sized construction firm members found that over two-thirds (69%) have not even heard of reverse charge VAT, and of those who have, more than two-thirds (67%) have not prepared for the changes.

The FMB has recommended a delay of at least six months to the changes to avoid what the association calls a “negative economic impact” on its members and the industry as a whole.

“Construction companies are already struggling with Brexit uncertainty, sky-rocketing material price rises and skill shortages and reverse charge VAT is yet another thing for them to deal with,” said Berry. “What makes things worse is that HMRC has failed to deliver on its promise to help the industry to prepare. The guidance is not user-friendly and even tax experts are scratching their heads over it.”

The lack of plain English guidance around the changes was recently flagged by AccountingWEB’s resident VAT expert Neil Warren. He was asked by an accountant to draft a letter spelling out the new rules to send out to clients affected by the changes, which he wrote and duly featured here on AccountingWEB.

HMRC ‘not doing enough’ to prepare the industry

The builders’ body also criticised HMRC for not doing enough to prepare the industry for the changes. The FMB letter states that the Revenue’s guidance document was only published four months before rules were due to be rolled out, and goes on to label the advice as ‘unclear’ and ‘contradictory’ in place.

HMRC was due to have a dedicated website and marketing campaign for the changes to help prepare the hundreds of thousands of construction companies impacted by the changes, but this has so far not materialised.

Cash flow implications

In the comments section below Neil Warren’s guidance letter, AccountingWEB regular lionofludesch also counselled that it was “worth warning” affected clients about the potential cash flow impact on their businesses – a point also picked up by the FMB.

In its letter to the government, the builders’ body stated that rolling out the reverse charge rules in October will have a “serious impact” on cash flow, as well as imposing a “significant administrative burden” on construction companies, “fundamentally changing” the way they invoice their clients and pay their taxes to HMRC.

The FMB warned that the industry was already starting to show signs of decline, with its latest ‘State of Trade Survey’ flagging the first fall in workloads for SME construction companies in six years.

“There is a real risk that these changes could lead to insolvencies if HMRC does not prepare the sector sufficiency,” stated Berry.

About Tom Herbert

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have a story that might interest us or wish to comment on the site's coverage get in touch via the site's private message function or Twitter DM (@AWebTom)

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24th Jul 2019 09:47

Without considering the pro's & con's of the proposed changes, I find it somewhat strange that the Trade Body for builders is saying that many builders are not aware of these proposals. If the FMB has 8000 members then surely they must already know and perhaps the quoted numbers who "may not be aware" include many sub contractors who will be aware of it via the main contractor or paying agency . How many of the 2/3 are actually VAT registered? It is so easy for Trade Associations to blame HMRC but what exactly is the purpose of the FMB if not to keep members informed?

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24th Jul 2019 10:46

VAT registered businesses have been forced to use software to comply with MTD but accounting software (such as Xero) is not ready for Reverse Charge on their VAT returns. They have said that they are aware of the need but can't guarantee to change their systems by 1st October.
So how are construction companies to produce invoices compliant with the Reverse Charge requirements and how do they file their VAT returns when the software they use can't deal with it?

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24th Jul 2019 10:55

carol-AT-du4accounts.com wrote:

VAT registered businesses have been forced to use software to comply with MTD but accounting software (such as Xero) is not ready for Reverse Charge on their VAT returns. They have said that they are aware of the need but can't guarantee to change their systems by 1st October.
So how are construction companies to produce invoices compliant with the Reverse Charge requirements and how do they file their VAT returns when the software they use can't deal with it?

Just import it into a spreadsheet, insert a net column for the reverse-charge total and complete from there.

Oh hang on, aren't spreadsheets the work of the Devil..?

It's as daft as presuming that since HMRC has a d-base of CIS-registered builders, the onus is on them to alert those firms of the changes.

Would those HMRC wonks with common sense please leave via the nearest exit. If you cannot work out what is the exit is, please remain seated.

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to Nick Graves
24th Jul 2019 11:03

I know I can do it but there are plenty of people still out their scratching their heads from MTD.
The invoices have got to be changed also and state the amount of VAT that is subject to reverse charges as well as including the figures on the VAT returns.
And....as you say....spreadsheets are the work of the Devil according to HMRC.....who forced VAT registered businesses into software...to avoid spreadsheets.....and so it goes!

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24th Jul 2019 21:59

carol-AT-du4accounts.com wrote:

VAT registered businesses have been forced to use software to comply with MTD but accounting software (such as Xero) is not ready for Reverse Charge on their VAT returns. They have said that they are aware of the need but can't guarantee to change their systems by 1st October.
So how are construction companies to produce invoices compliant with the Reverse Charge requirements and how do they file their VAT returns when the software they use can't deal with it?

Oh, come, come - Builders can't issue an invoice without software ? How did we manage before computers ?

I'm not having this - it was announced months ago. All my contractor and subcontractor clients could operate this tomorrow.

Admittedly, it would be a lot easier if it wasn't for MTD but a couple of judicious journals will solve any issues.

Incidentally, I'm a noted technophobe.

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28th Jul 2019 17:34

You're making a very good point, I wonder if HMRC have clocked it yet?

If builders (well, everyone) have been driven to adopting software like xero for their accounting because of MTD then I guess HMRC (etc) now need to get switched onto there being a new reality. This reality being they must set target dates based on giving the companies who make xero etc enough time to implement the changes into their software.

Because surely, the advantage of using a tool like xero is comes when you use it fully, not in parts i.e. you now issue ALL your invoices through it so that it now has ALL of your financial transactions. I can't see the point of half using such a system (but I'm not an accountant- much less an accountant who has external small clients - so I could be grooving in my own little world here).

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to flightdeck
28th Jul 2019 17:51

I'm sorry - builders still have to work out the VAT, just like the old days.

But now they put it somewhere else on the invoice.

How is that a huge problem ?

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to flightdeck
29th Jul 2019 06:40

Absolutely. Keeping two-thirds of your books on online software with the rest on some disconnected bits of paper is an idea that brings me out in hives. When you move to online surely you commit completely?
Otherwise, at the very least your accountant's bill will be just as big as usual and you're doing half the inputting.

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24th Jul 2019 11:45

Another HMRC hairbrained scheme to put on top of MTD.

Who thinks up this 'nonsense'. They can't cope as it is, so yes lets put another change onto businesses to add to the already difficult time they are having!

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24th Jul 2019 13:57

And all this time everyone is fully occupied 'managing change' nobody has any time to deliver product to the paying customer.
In the next breath some government wonk is banging on about the poor growth in GDP; anybody in government bright enough to figure they are the partly responsible?

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24th Jul 2019 15:59

It would be handy if you could just enter the subbies invoice with no vat and not have to mess about adding vat to both purchase costs and a notional output tax... thats going to confuse them...

I can see them adding vat to the Purchase and accidentally forgetting to add notional sales vat.... big loss of vat coming....

Most reverse charge people are smart to be involved and be in that neck of the woods. Unfortunately the little builders.....

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24th Jul 2019 16:51

Maybe HMRC will be happy when all the small business entities close down and claim benefits . At least then they won't have a tax gap to fill.

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By 4b4
24th Jul 2019 20:38

Oh, hang on (again!), did anyone mention penalties for errors?

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25th Jul 2019 15:26

Most other EU countries have had this in place for years, but we do like to complain at every chance we get in this country don't we.

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By spilly
26th Jul 2019 00:24

Surely it would make sense for MTD to bed in properly before adding any further complexities in?
None of my small builder clients were aware of this change before we alerted them to it. Most have expressed concerns about how they will manage their cash flow for the first couple of VAT periods.
They tend to work on small margins anyway, so it may make some decide to pack it in or downsize so they fall under the VAT limit. Surely not the result that HMRC envisaged.

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26th Jul 2019 01:35

What no-one seems to mention is that to invoice for a reverse charge service as a subcontractor you have to use the Accrual scheme. Assuming most smaller firms are on a Cash basis, yes, going forward the business will be no worse off, but how many businesses can afford the transition?

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to EJonesFM
26th Jul 2019 12:08

EJonesFM wrote:

What no-one seems to mention is that to invoice for a reverse charge service as a subcontractor you have to use the Accrual scheme.

Why ?

There's no VAT charged.

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26th Jul 2019 11:23

I hate to go against the grain here, but this is in practice one of HMRC's better ideas. If most of the output VAT is reverse charge, the exposure to penalties for most businesses affected in relation to their supplies is almost eliminated, for the simple reason that even if they applied the wrong VAT rate, there is no tax lost. There is a small downside in having to finance VAT on purchases, but this is offset by being able to transfer to accrual accounting. Then, from the point of view of HMRC (and the rest of us) no longer will the likes of Carillion recover ALL the input VAT on purchases, for which they have not paid and then go bust, followed by the suppliers having to minimise their losses by claiming bad debt relief. In addition, by removing cash from the equation, missing trader fraud (where it exists) is completely eliminated.

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By spilly
to mbuffery
26th Jul 2019 11:49

I’m not against the changes. It’s just that the lack of information, combined with the short time scale before implementation means that smaller businesses are unlikely to be prepared properly. If this was to start next year, then both software providers and clients should be able to sort out what is needed to be fully compliant.

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to spilly
26th Jul 2019 12:26

spilly wrote:
If this was to start next year, then both software providers and clients should be able to sort out what is needed to be fully compliant.

Software providers had (more or less) a year's notice.

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to mbuffery
26th Jul 2019 12:13

mbuffery wrote:

I hate to go against the grain here, but this is in practice one of HMRC's better ideas.

Let's take it a stage further then. Let's say that no-one charges VAT to another registered trader. All the supplier have to do is verify that the customer is VAT registered every time they issue an invoice.

Suddenly, it doesn't sound so good.

If there's been fraud in the industry, I can see the reason for going for this scheme. Without knowing the extent of the fraud, I can't comment on whether or not this is a sledgehammer to crack a nut.

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29th Jul 2019 10:06

My point was......that when MTD came in and VAT registered businesses were obliged to use software to file their VAT returns HMRC gave a list of 'approved' software. Then.....a scant 6 months later there is a change to the way construction VAT is invoiced and accounted for and the bulk of the 'approved' software companies haven't got their act together to deal with it.
Just strikes me as a little short sighted that it wasn't dealt with together or a sufficient enough time difference so that the accounting software people could get their act together in time.
Yes, we can all deal with it manually or use spreadsheets or whatever but isn't that a ginormous step backwards when HMRC's prime intention was to get businesses to use software!

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29th Jul 2019 10:19

carol-AT-du4accounts.com wrote:

Yes, we can all deal with it manually or use spreadsheets or whatever but isn't that a ginormous step backwards when HMRC's prime intention was to get businesses to use software!

The whole MTD project is based on on the mistaken assumption that VAT is a lot simpler than it actually is.

If you think that software writers are going to cover every eventuality, you can expect to be disappointed.

That said, HMRC could have published their detailed proposals much earlier. Why not in the Budget Releases ? On the other hand, it's not so bad that the Reverse Charge should be delayed.

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29th Jul 2019 10:19

carol-AT-du4accounts.com wrote:

Yes, we can all deal with it manually or use spreadsheets or whatever but isn't that a ginormous step backwards when HMRC's prime intention was to get businesses to use software!

The whole MTD project is based on on the mistaken assumption that VAT is a lot simpler than it actually is.

If you think that software writers are going to cover every eventuality, you can expect to be disappointed.

That said, HMRC could have published their detailed proposals much earlier. Why not in the Budget Releases ? On the other hand, it's not so bad that the Reverse Charge should be delayed.

Thanks (0)
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29th Jul 2019 10:06

My point was......that when MTD came in and VAT registered businesses were obliged to use software to file their VAT returns HMRC gave a list of 'approved' software. Then.....a scant 6 months later there is a change to the way construction VAT is invoiced and accounted for and the bulk of the 'approved' software companies haven't got their act together to deal with it.
Just strikes me as a little short sighted that it wasn't dealt with together or a sufficient enough time difference so that the accounting software people could get their act together in time.
Yes, we can all deal with it manually or use spreadsheets or whatever but isn't that a ginormous step backwards when HMRC's prime intention was to get businesses to use software!

Thanks (0)
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30th Jul 2019 10:31

As a Cash Accounting business with 80% of sales to an End User and 20% as a Sub-contractor, the question is...

Do we keep the 20% going and transfer over to Accurals, as required to invoice DRC services, or do we move to Main Contractor services only?
Or somehow run accurals only on the subcontractor sales? something I'm sure online software is not going to support.

With 200k in sales this quarter already, I'm pretty sure I can't afford to pay accrued VAT on the 80% in the next.

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to EJonesFM
30th Jul 2019 10:50

EJonesFM wrote:

Do we keep the 20% going and transfer over to Accurals, as required to invoice DRC services, or do we move to Main Contractor services only?

I asked this before but you didn't answer.

Why are you moving to Accruals ?

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