Time to get ready for domestic VAT reverse charge

After months of delay the domestic VAT reverse charge for construction is on course to be introduced in a few weeks.

Swindon-based Optimum Professional Services is advising businesses that now is the time to prepare.

The rules, which come into force on 1 March, will apply to all businesses registered for VAT which are in the construction sector, irrespective of size.

Michael Blaken, Accounts Director at Optimum, said: “The domestic reverse charge for building and construction services was originally planned to come into force in 2019, but was delayed twice. 

"However, it is now on course for the March 1 introduction. The rules around the VAT Reverse Charge are complicated, so the sooner businesses prepare the better.”

A domestic reverse charge means any business customer receiving supplies of construction services, subject to the Construction Industry Scheme, must account for the VAT due on these supplies on their VAT return, as opposed to the supplier doing so. 

This follows similar measures introduced in other sectors, and is an attempt to remove the scope for VAT fraudsters.

Mr Blaken said: “Businesses need to adapt their accounting systems for dealing with VAT. 

"Also, there will potentially be a negative impact on the cashflows, primarily because businesses will no longer get VAT payments from customers for services where the reverse charge applies.

“Contractors will also need to review their contracts with sub-contractors, to decide if the reverse charge will apply to the services received under the contracts. If they do, suppliers will need to be notified.”

One key issue for concern is that the March 1 start date is so close to the 31 March deadline set for paying VAT arrears, under the financial measures introduced to help businesses through the pandemic.

Any VAT deferred during the VAT payment holiday between 20 March and 30 June last year will be fully due by 31 March, potentially further exacerbating cashflow issues, although a new system is being introduced to split the deferred VAT from 2020 across 12 smaller payments up to March 31, 2022.

Mr Blaken added: “Depending on individual circumstances, it may make sense to opt for monthly VAT returns or, in other cases, to leave the VAT flat rate scheme. 

"All this needs deciding upon and putting in place before March 1 – which is only a few weeks away.”

People needing help and advice with the new VAT reverse charge or any support with tax and accounting can get in touch with Optimum] by emailing [email protected], calling 01793 538198 or visiting https://www.optps.co.uk/