Businesses in the construction industry have been given an additional five months to prepare for a major tax change, after HMRC announced a delay to the measure.

The domestic reverse VAT charge for construction services was due to take effect from 1 October 2020, but has now been postponed until 1 March 2021 to relieve pressure on businesses affected by the coronavirus pandemic.

This is the second time the new measure has been delayed, but the announcement was welcomed by various business and taxation bodies.

Linda Skilbeck, vice-chair of the Chartered Institute of Taxation's indirect taxes committee, said:

"We welcome the further delay because of the many unexpected pressures caused by the pandemic and the lockdown on construction businesses.

"A significant proportion of those are SMEs, and the cashflow effect of the domestic reverse charge will be significant.

"The delay should lessen the chance of disputes between suppliers and customers as to which party in the supply chain should account for VAT."

What is the domestic reverse charge?

The domestic reverse VAT charge is a significant change to the way VAT is collected in the building and construction industry.

It will mean the customer who receives a service will need to pay the VAT due to HMRC, instead of paying it to the supplier.

This is intended to prevent cases of VAT fraud that have been reported in the construction industry, where suppliers have charged their customer for VAT but kept the money instead of paying it to HMRC.

The charge applies to specified services that are reported under the construction industry scheme.

Why was it delayed?

The charge was originally set to come in from 1 October 2019, but it was put on hold for 12 months to give businesses more time to prepare for the UK's exit from the EU.

On 5 June 2020, a further five-month delay was announced after businesses in all sectors were affected by the outbreak of COVID-19 and the resulting lockdown.

HMRC said this extension to the deadline would "help businesses overcome the effects that the coronavirus pandemic has had on them and give them more time to prepare".

What do you need to do to get ready?

If your business operates in the building and construction industry, it's important to remember the measure has been postponed - not cancelled.

You'll still need to take the following steps to prepare if you haven't done so already:

  • Check whether the reverse charge affects either your sales and/or purchases
  • Update your accounting software to deal with the reverse charge
  • Assess the impact of the change on your cashflow
  • Make sure any staff who are responsible for VAT accounting know how to deal with the reverse charge.

If you're a contractor, you'll need to review all of your contracts with subcontractors, work out whether the reverse charge will apply, and notify your suppliers if it will.

If you're a subcontractor, contact your customers to find out whether the reverse charge will apply.

HMRC said it "understands that implementing the reverse charge may cause some difficulties", and has promised to take a light-touch approach to any errors made in the first six months of the new legislation.

Those errors will need to be corrected as soon as possible, however, and you need to show that you were trying to comply with the rules and that you have "acted in good faith".

We can talk you through the way the reverse charge works, and what you need to do ahead of the new implementation date.

Get in touch to discuss the domestic reverse charge for VAT.