Construction Services & VAT – A Curate’s Egg
The last few weeks has found Liz Maher, Centurion VAT regularly engaged in discussing the planned VAT changes known as the Domestic Reverse Charge for the Construction Services sector.
Events ranged from a Wales office meeting hosted by the Welsh Secretary Alun Cairns on the 27th August and attended by the Business, Energy and Industry Strategy Minister Andrea Leadsom, where I raised it as a concern for the construction sector to update sessions for the sector itself with Constructing Excellence in Wales.
In between these external sessions, there have also been "Inform and Plan" sessions for our construction sector clients to broaden the understanding of the impact both in cashflow terms and VAT accounting arrangements. A busy time all round therefore, so why the "Curate's Egg"?
The Good Bits – making it clear to both Ministers that, whilst they were concerned to learn of the practical issues that businesses face from Brexit, what a lot of businesses are actually concerned about are the issues already on their desks - which from the VAT perspective were:
• the roll out of the Making VAT Digital changes and,
• for the construction sector the negative impact they faced from the planned Domestic Reverse Charge – at that point due in from 1st October 2019.
Better bit – seeing that, by the start of Sept, HMRC announced that the Domestic Reverse Charge would be delayed to 1 October 2020 – a year's reprieve. More accurately, a year to plan for a change which it was clear that the majority of the construction sector – in all its guises – had seemed largely unaware of as 1st October 2019 approached.
The "not so" good bits – with the delay in implementation, HMRC re-iterated their concern over the issue the measure had been designed to resolve – that of Missing Trader Fraud.
This is where a sub-contractor provides construction services to a main contractor; invoices plus VAT for the works; is paid the VAT but disappears before passing that VAT payment across to HMRC on their VAT Return – hence the "Missing" moniker!
HMRC have put in place a Supply Chain Fraud Investigation team and part of their brief was to look at the construction sector to identify the internal controls and compliance that main contractors have in place, to ensure they can identify transactions in their supply chain that could alert them to possible risk of VAT fraud.
There is the clear expectation from HMRC, that main contractors should be undertaking checks on the VAT compliance of their supply chain.
These checks should include checking:
• Are those suppliers correctly VAT registered,
• charging VAT correctly on their supplies and,
• accounting correctly for VAT paid to them through their VAT returns to HMRC.
We have seen one instance, where a main contractor was asked by HMRC why they didn't request a copy of the VAT return of their subcontractor to evidence that they were happy that the VAT paid to them had been declared.
The delay in the implementation of the Domestic Reverse Charge will see an increase in the HMRC's Supply Chain Fraud team's activity therefore – that's HMRC's words not mine.
It was good to be able to share these updates at the recent Constructing Excellence in Wales briefing on the direction of travel on this VAT issue. It will remain important, with all the issues currently on the agenda for businesses, that the construction sector doesn't lose sign of the changes that will arise in October 2020. We'll continue to share news on the matter and help businesses plan for the effect of these, or indeed any other VAT changes on their way.
Starting the conversation now with sub-contractors to explain or indeed reassure them how the new Domestic Reverse Charge for VAT will affect both their VAT invoicing arrangements and more importantly adversely affect their business cashflow position post October 2020 will be important.
Planning particularly for:
• conversations that need to be had with the bank to reflect how cashflow needs in the business will be affected
• changes to your VAT invoice format to identify DRC treatment
• whether a move from a quarterly to monthly VAT return would benefit
• identifying what construction services are covered
• identifying whether your customers are End Users or not in the VAT context
This list is not exhaustive but illustrates why getting ready for the VAT Domestic Reverse Charge is so important.
The issue, therefore, is a bit of a Curate's Egg but we would say when faced with a VAT related Curate's Egg moment, it's important to get EGG-pert support!
If you have any questions, please do not hesitate to contact firstname.lastname@example.org or your direct contact at Centurion if you have one.