Due to the current pandemic, construction businesses will get an extra five months to prepare for a major change in accounting for VAT.
This is a move very much welcomed by the CIOT, as without this delay there was a chance this major tax change could risk hitting SMEs the hardest at a time when they need to protect jobs and livelihoods.
The introduction of the domestic reverse VAT charge for construction services has changed from 1st October 2020 to 1st March 2021.
The new rules mark a complete overhaul of the way VAT is payable on building and construction invoices, as part of moves to reduce fraud in the sector. Under the domestic reverse charge the customer receiving the service will have to declare the VAT to HMRC in its own VAT return instead of paying the supplier.
The changes only apply to supplies of building or construction services made to or received by businesses registered for UK VAT, where such a supply must be reported through the Construction Industry Scheme (CIS). Hence, it will not apply to consumers or businesses customers not meeting the reporting criteria.
Linda Skilbeck, Vice Chair of the CIOT’s Indirect Taxes Committee, commented, “We recognise that it is extremely difficult for the Treasury and HMRC to achieve the right balance between maintaining ‘business as usual’, while also supporting businesses through this difficult period with COVID-19.
“We welcome the further delay to the implementation of the domestic reverse charge for construction services to 1st March 2021 because of the many unexpected pressures caused by the pandemic and the lockdown on construction businesses, of which a significant proportion are SMEs. The cash flow effect of the domestic reverse charge will be significant, and this is compounded by the added effect of reduced business activity due to COVID-19 restrictions.
“The change to the legislation to clarify the position as to when the reverse charge applies should also lessen the chance of disputes between suppliers and customers as to which party in the supply chain should be accounting for VAT.
“We hope HMRC will work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses are ready for the new implementation date.”
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