Since 1st March 2021 there have been significant changes to the way VAT is accounted for by many businesses in the construction sector.  The change states that the customer must ‘self-account’ for the VAT due instead of paying the supplier – this is known as a reverse charge.  

This is a fundamental shift in the way in which VAT is administered in construction contracts.  This is welcome news for many businesses within the construction sector as the key driver behind the change has been brought in the fight against VAT fraud in the industry, where VAT is collected by businesses, but it has not been repaid to HMRC. However, for many it may present a significant impact on a business’s cash flow.  

When might the reverse charge apply?  

The Reverse Charge may apply when a VAT- registered construction business supplies construction services to another VAT-construction business. The recipient accounts for the VAT to HMRC through its VAT return, instead of paying it to the supplier.  

It should be highlighted that the position of VAT liability of supplies from a legal perspective remains unchanged.  

Who does the reverse charge apply to?  

The reverse charge will apply when a sub-contractor provides construction services to a contractor, who recharges those services up the chain. However, it shall not apply to when the customer is an end-user for example, a property owner. In this case, the contractor must charge VAT on their invoice in the traditional way.  

How will businesses be affected?  

The change will bring significant ramifications for the construction industry. The introduction of the reverse charge has been postponed twice and it is still anticipated to present a challenge as the application of the new rules bed down.  

The reverse charge will have a significant impact on how businesses within the construction sector account for VAT and manage their cash flows. Businesses that rely on VAT collected from their customers as working capital may suffer cash flow problems now the reverse charge has been implemented. Such businesses may wish to revise their payment terms to mitigate cash flow issues arising from the changes.  

Comments from a Tax Specialist:

We raised the above issue with Craig Tully who is a partner with Gilbert Tax and owner of Integra Advisers and his comments were as follows:  

‘Business needs to ensure they take these changes seriously, the effect on cash flow can be significant and this could cause companies to end up in financial difficulties. Also, it won’t be long before HMRC take the gloves off and start clamping down on those not following the rules, investigations and fines will follow which are costly in terms of time and money.” 

Final Thoughts  

In conclusion, these changes will have an impact on construction potentially resulting in financial hardship for a lot of businesses. Whilst HMRC has said they will apply a light touch in the first six months to errors made by those trying to comply, preparation is key to ensure a smooth transition into the new rules.  

We can assist in aspects of understanding and applying the new rules into your business. If you require further information on the contents of this article, please call our offices on 0113 266 0735.