VAT change to increase costs in property and construction sector

Philip Hammond’s announcement that VAT responsibility will shift up the supply chain could cause an administrative headache and extensive additional costs, according to John Voyez, VAT partner at Smith & Williamson.

The Government plans to introduce a domestic VAT ‘reverse charge’ from 1 October 2019, following a consultation on tackling fraud in construction industry labour supply chains.

The reverse charge will shift responsibility for paying VAT along the supply chain, with the aim of preventing VAT losses.

The measure will effectively mean that the business recipient of the labour supplies will become liable to account for the VAT under the reverse charge arrangements. The long lead-in before implementation is to provide businesses time to prepare for the change.

“Ultimately the VAT will be cost neutral so there will be less money sloshing around in the market. As a result, in terms of combatting VAT fraud, there are some admirable points. However, for those companies that are already law-abiding, it places an additional burden to track VAT and arguably makes them do the job that HMRC should already be doing,” said John.

“Businesses could be forced to hire additional administrative staff to stay on top of VAT. Larger businesses will likely be able to subsume the cost/activity within their existing administrative staff but mid-tier businesses could be heavily hit by the change. Hiring staff that are able to keep on top of the vast intricacies of VAT across numerous sites, and contractors, could prove costly.”

“Businesses will have to suffer this cost as it’s fairly unlikely the end user will want to see the price go up, so margins in the industry will become thinner.”

The change has been semi-successfully introduced in to other European states. However, these stats tend to just have a single rate of VAT which is paid. The UK has three rates: zero-rated, 5% and 20%. It will not be for the company giving out the contract to decide whether the work, or part of the work, falls in to what category.

“In the grand scheme of things this particular aspect may not have such a big impact. The companies giving the contract always did have the ability to challenge the VAT invoice. However, it does bring a level of additional uncertainty to the market which wasn’t there before,” said John.

Update – 12/09/2019

It was announced on Friday 6 September that the Domestic Reverse Charge (DRC) for buildings and construction services will be delayed until 1 October 2020 (previously set for 1 October 2019).

This is due to the substantial lack of awareness of the new rules and to avoid coinciding with any Brexit. HMRC has also recognised that businesses in the construction sector will need time to prepare for the impact of new rules as well as adverse cash-flows for many affected businesses.

The purpose of the DRC for building and construction services (whereby each party in the supply chain self-accounts for the VAT until the end user) is to combat fraud. In order to avoid HMRC disallowing VAT paid, it is essential that businesses receiving building services carry out sufficient due diligence on their suppliers. This will need to be demonstrated to HMRC if there is a fraudulent party in the supply chain.

Please contact us if you wish to discuss the VAT changes further, including due diligence on suppliers and with the application and effect of the new rules when they come into force.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.