Prepare for the Introduction of Reverse VAT

Prepare for the Introduction of Reverse VAT
A few months ago, HMRC released guidance on the new VAT system which will affect the construction industry across the UK. The Construction Services Domestic Reverse Charge, also known as 'Reverse VAT', refers to a new way of collecting VAT from businesses that provide construction services in the UK and within the scope of the construction industry scheme (CIS). The new system means that VAT will no longer be paid to businesses in the supply chain, unless they are providing those services directly to the end user. Instead, the responsibility will sit with the businesses that receive the construction services, in an attempt to ensure the Government is recovering the correct amount of VAT and tackle fraudulent activity.

If your business is both VAT registered and CIS registered, this will affect you. Those receiving the construction services will pay VAT directly to HMRC, and therefore, tier 2 contractors working for other contractors will not receive VAT on their construction services. This will have major implications on cash flow, as cash that you may be using as working capital will no longer be available under reverse VAT. If you are a tier 1 contractor, it is likely that cash flow in the short term will improve, however, VAT payments at the end of each quarter will increase.

The original date for the introduction of Reverse VAT was 1 October 2019. However, after a recent call from 15 organisations, including Build UK and the National Federation of Builders (NFB), the process has been delayed by a year and will now be introduced on 1 October 2020.  These organisations raised their concerns about the new system, and argued that the timing was not appropriate due to the uncertainty surrounding Brexit. They also raised the negative implications of reverse VAT, including a loss of productivity, reduced cash flow and have a negative impact on job security. Small businesses are particularly at threat, as on average 44 hours per year (6 working days) are spent on VAT compliance. It is important to be aware of these changes, and be fully prepared for the affect this will have on cash flow when the time comes.

To help businesses prepare for the new system, Build UK has prepared a practical guide and short film.

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