On 5 June 2020, HMRC announced that the VAT reverse charge on building and construction services (the VRC) will be delayed until 1 March 2021 as a result of the impact of the coronavirus pandemic on the construction sector.
The VRC was originally planned for implementation in 1 October 2019 but had already been delayed to 1 October 2020 in response to industry concerns that businesses were not ready to implement the changes (see our previous Insight here).
In addition to the further delay in the commencement of the VRC the legislation governing the VRC, which was laid in April 2019, will also be amended. It will be a requirement that for businesses to be excluded from the VRC because they are end users or intermediary suppliers, they must inform their sub-contractors in writing that they are end users or intermediary suppliers. This is to make sure both parties are clear whether the supply is excluded from the reverse charge. It reflects recommended advice published in HMRC guidance and brings certainty for sub-contractors as to the correct treatment for their supplies. If followed, it will remove a concern that HMRC may seek to challenge the reverse charge treatment where a business that qualified as an end user or intermediary supplier had not given any notification of their status.
The UK government proposed the VRC in response to perceived high levels of VAT fraud and avoidance in the construction industry. In our previous Insight here we discuss the background to the VRC and how it works. In summary, under the VRC, the UK customer who gets supplies of construction services, rather than the UK supplier, must account for the VAT due on these supplies on their VAT return. The VRC will have a major impact on construction businesses as they will need to adapt their accounting systems for dealing with VAT. There will be a negative impact on the cash-flows for many affected businesses, as they will no longer get VAT payments from customers for services where the reverse charge applies.
Osborne Clarke comment
Although the delay of five months is helpful as construction businesses will have longer to prepare for the introduction of the VRC, industry bodies had called for its introduction to be delayed by a year.
The COVID-19 pandemic has severely affected the construction industry. The introduction of the VRC requires administrative changes to accounting systems and processes, and those construction companies that have furloughed staff dealing with those functions may find even the delayed date of 1 March 2021 challenging.
In addition, as the virus has significantly impacted activity levels of construction businesses (and therefore cash-flow), the additional negative impact of the VRC on the cash-flows could be problematic. Many smaller construction companies, who often rely on the cash-flow benefit of being the person through whom the VAT is paid, could end up going under. This is particularly the case where those businesses have accessed government-backed emergency funding schemes, as they will be using profits to pay back those loans.
It is hoped that the government will continue to assess the impact of the implementation of the VRC on the construction industry as the COVID-19 pandemic plays out.