Reverse charge VAT means that the customer receiving the service will have to pay the VAT to HM Revenue & Customs instead of paying the supplier. The reverse charge applies through the supply chain where payments are required to be reported through the Construction Industry Scheme.
For construction companies, this means reduced cashflow and higher administration costs.
A recent survey by the Federation of Master Builders (FMB) found that 69% of its 8,000 member firms new nothing about the impending changes and so had done nothing to prepare for it.
The FMB is one of 15 signatories to a letter from the construction industry to chancellor Sajid Javid seeking six-months’ grace “to give the industry some breathing space following Brexit,for HMRC to fully assess the impact of the changes on the industry, and to ensure businesses are adequately prepared”.
The other signatories are the: British Construction Steelwork Association (BCSA), Build UK, Building Engineering Services Association (BESA), CivilEngineering Contractors Association (CECA), Construction Products Association (CPA), Electrical Contractors’ Association (ECA), SELECT (Scottish electrical contractors), the Federation of Small Businesses(FSB), Finishes & Interiors Sector (FIS), Lift & Escalator Industry Association (LEIA), National Federation of Builders (NFB), Scaffolding Association, Scottish & Northern Ireland Plumbing Employers Federation (SNIPEF) and the Specialist Engineering Contractors’ Group (SEC Group).
Their letter to the chancellor says: “If introduced in October, we believe reverse charge VAT will have a significant negative economic impact on the industry, substantially increasing the burden on business and restricting cashflow. The timing of these changes could not be worse given they are due to take place just before the UK is expected to leave the EU, quite possibly on ‘no-deal’ terms.
“Reverse charge VAT will be yet another burden on construction employers on top of other pressures facing the industry, such as material price rises, increased pension contributions and skills shortages. On top of these, reverse charge VAT could lead to a loss of productivity, reduced cashflow and in the worst cases, lead to a hit on jobs, tipping some companies over the edge. Small business owners will be least able to cope, as they already spend on average 44 hours per year, which is the equivalent to six working days, on VAT compliance and are currently getting to grips with ‘making tax digital’ for VAT returns. Reverse charge VAT will exacerbate the squeeze on cashflow, with construction being the sector where late payment is most rife. “As you know, the construction industry accounts for 9% GDP and is key to delivering the government’s house-building and infrastructure objectives. This will not be possible with further disruptive changes such as this.”
FMB chief executive Brian Berry said of the letter: “The fact that 15 of the leading construction trade bodies have come together to speak to the government with one voice on this issue shows the extent to which we are concerned. We urge the government to rethink the timing of these changes and announce a delay of at least six months. With a potential no-deal Brexit also due to take place in October, the timing could not be worse.”
CECA chief executive Alasdair Reisner said: “Civil engineering contractors are extremely worried about the impact of the forthcoming new rules on their immediate cashflow and the impact that this will have on business sustainability. The construction sector is already struggling due to ongoing political uncertainty, with declining workloads for many members. The introduction of the reverse charge VAT may push small contractors into the red, as they do not have the resources to manage the immediate impact of the legislation change. We are therefore calling on government to delay the implementation of reverse charge VAT and work with industry to help businesses prepare for the new rules in the best possible way.”
NFB chief executive Richard Beresford said: “For an industry facing lighter workloads, increasing pressure on cash flow and an already high rate of insolvency, reverse charge VAT could not have come at a worse time. By delaying the introduction of this measure, the industry will have more time to properly prepare and make their businesses more resilient, and more detailed guidance can be provided to ensure a smooth introduction.”
However, FIS chief executive Iain McIlwee said: “This isn’t about industry not being prepared, but not being able to prepare. Whilst we’ve known about it for a long time, the information has only started to emerge from HMRC in terms of the process. We’ve been telling members about it, running workshops and webinars, but I’ve yet to meet someone who has had the letter from HMRC and so there are swathes of the market that still don’t know it is happening. Many of the accountancy software companies haven’t updated the software. The biggest issue, however, it is not the admin, it’s the impact on cashflow. Credit in construction is already tight and with few lifelines from traditional financiers, further drains on cash will be fatal for some companies – this is almost impossible to prepare for. I don’t think anyone could have seen the uncertainty into which this would be launched and consequently a pause would be prudent.”
Steve Bratt, chief executive of the ECA Group, said: “The government needs to urgently reconsider the timing of their reverse VAT introduction. With insolvencies already at such a high level, and a no-deal Brexit on the horizon, these changes could hit business cashflow at a pivotal time for industry.”