The delayed introduction of the Domestic VAT reverse charge for construction services will now come into force on the 1st March 2021. It was scheduled for introduction in October 2019 but was pushed back to allow businesses more time to prepare and not to coincide with Brexit (this has been pushed back again from October 2020 due to Covid-19).
Intended to combat VAT fraud within the construction sector, it will have a significant impact on accounting practices but also business cash flow for those affected.
What’s happening
The aim of this measure is to combat missing trader fraud (VAT fraud) which is prevalent in the construction industry; a company will collect VAT and then ‘disappear’ before the VAT is due, leaving the exchequer significantly short (with the service likely supplied at a discounted rate, undercutting competitors). One way to combat this is to remove the ability for a company to charge and collect VAT. Indeed, this already happens in the sale of microchips and mobile phones to great success.
Under this new regime, a VAT registered business supplying certain construction services to another VAT-registered business will issue a VAT invoice stating that the service is subject to the VAT reverse charge. The recipient of the supply must now account for the VAT, instead of paying the VAT amount to the supplier, as is currently the case.
The construction services specified generally align with those outlined in the Construction Industry Scheme (CIS). However, it is also stated that the domestic reverse charge of VAT does not include supplies of staff or workers through employment businesses. As a recruitment business, your clients should not withhold VAT in this way.
Impact of the VAT reverse charge
The impacts of this new measure are heavily weighted towards the construction business. In the first instance, the affected businesses will need to ensure their accounting systems are capable of managing reverse charge supplies. Businesses that rely on collected VAT as working capital until it is due will have to plan for a reduction in cashflow – a serious concern for a sector already feeling the pressures of Brexit, Coronavirus, tight margins and corporate failures.
The reverse charge will not apply to recruitment businesses supplying construction-based workers. These workers are engaged by the employment business (agency) and not the construction businesses that requires their services and this is an important distinction.
Having said that, Financial controllers and directors of their clients may be looking at creative ways to alleviate their cash flow issues. Expect negotiations on payment terms. It is also hard to say whether in time, cash strapped construction clients would continue to consider recruitment agencies as employment businesses – if they don’t, we may see attempts to impose the measure on recruitment companies too.
The recruitment company’s relationship with umbrellas
Much like a recruitment agency, umbrella payroll companies are exempt from the measure. We will be expecting business to continue as usual, with our invoices to include for VAT and this to be collected and paid by Clipper Contracting Group.
For more information or concerns, feel free to contact us on 01305 233170.
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