Reverse charge VAT means that the customer receiving the service will have to pay the VAT to HM Revenue & Customs instead of paying the supplier. The reverse charge applies through the supply chain where payments are required to be reported through the Construction Industry Scheme.
For construction companies, this means reduced cashflow and higher administration costs.
A recent survey by the Federation of Master Builders (FMB) found that 69% of its 8,000 member firms new nothing about the impending changes and so had done nothing to prepare for it.
The FMB is one of 15 signatories to a letter from the construction industry to chancellor Sajid Javid seeking six-months鈥� grace 鈥渢o give the industry some breathing space following Brexit,for HMRC to fully assess the impact of the changes on the industry, and to ensure businesses are adequately prepared鈥�.
The other signatories are the: British Construction Steelwork Association (BCSA), Build UK, Building Engineering Services Association (BESA), Civil Engineering Contractors Association (CECA), Construction Products Association (CPA), Electrical Contractors鈥� Association (ECA), SELECT (Scottish electrical contractors), the Federation of Small Businesses(FSB), Finishes & Interiors Sector (FIS), Lift & Escalator Industry Association (LEIA), National Federation of Builders (NFB), Scaffolding Association, Scottish & Northern Ireland Plumbing Employers Federation (SNIPEF) and the Specialist Engineering Contractors鈥� Group (SEC Group).
Their letter to the chancellor says: 鈥淚f introduced in October, we believe reverse charge VAT will have a significant negative economic impact on the industry, substantially increasing the burden on business and restricting cashflow. The timing of these changes could not be worse given they are due to take place just before the UK is expected to leave the EU, quite possibly on 鈥榥o-deal鈥� terms.
鈥淩everse charge VAT will be yet another burden on construction employers on top of other pressures facing the industry, such as material price rises, increased pension contributions and skills shortages. On top of these, reverse charge VAT could lead to a loss of productivity, reduced cashflow and in the worst cases, lead to a hit on jobs, tipping some companies over the edge. Small business owners will be least able to cope, as they already spend on average 44 hours per year, which is the equivalent to six working days, on VAT compliance and are currently getting to grips with 鈥榤aking tax digital鈥� for VAT returns. Reverse charge VAT will exacerbate the squeeze on cashflow, with construction being the sector where late payment is most rife. 鈥淎s you know, the construction industry accounts for 9% GDP and is key to delivering the government鈥檚 house-building and infrastructure objectives. This will not be possible with further disruptive changes such as this.鈥�
FMB chief executive Brian Berry said of the letter: 鈥淭he fact that 15 of the leading construction trade bodies have come together to speak to the government with one voice on this issue shows the extent to which we are concerned. We urge the government to rethink the timing of these changes and announce a delay of at least six months. With a potential no-deal Brexit also due to take place in October, the timing could not be worse.鈥�
CECA chief executive Alasdair Reisner said: 鈥淐ivil engineering contractors are extremely worried about the impact of the forthcoming new rules on their immediate cashflow and the impact that this will have on business sustainability. The construction sector is already struggling due to ongoing political uncertainty, with declining workloads for many members. The introduction of the reverse charge VAT may push small contractors into the red, as they do not have the resources to manage the immediate impact of the legislation change. We are therefore calling on government to delay the implementation of reverse charge VAT and work with industry to help businesses prepare for the new rules in the best possible way.鈥�
NFB chief executive Richard Beresford said: 鈥淔or an industry facing lighter workloads, increasing pressure on cash flow and an already high rate of insolvency, reverse charge VAT could not have come at a worse time. By delaying the introduction of this measure, the industry will have more time to properly prepare and make their businesses more resilient, and more detailed guidance can be provided to ensure a smooth introduction.鈥�
However, FIS chief executive Iain McIlwee said: 鈥淭his isn鈥檛 about industry not being prepared, but not being able to prepare. Whilst we鈥檝e known about it for a long time, the information has only started to emerge from HMRC in terms of the process. We鈥檝e been telling members about it, running workshops and webinars, but I鈥檝e yet to meet someone who has had the letter from HMRC and so there are swathes of the market that still don鈥檛 know it is happening. Many of the accountancy software companies haven鈥檛 updated the software. The biggest issue, however, it is not the admin, it鈥檚 the impact on cashflow. Credit in construction is already tight and with few lifelines from traditional financiers, further drains on cash will be fatal for some companies 鈥� this is almost impossible to prepare for. I don鈥檛 think anyone could have seen the uncertainty into which this would be launched and consequently a pause would be prudent.鈥�
Steve Bratt, chief executive of the ECA Group, said: 鈥淭he government needs to urgently reconsider the timing of their reverse VAT introduction. With insolvencies already at such a high level, and a no-deal Brexit on the horizon, these changes could hit business cashflow at a pivotal time for industry.鈥�
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