VAT reverse charges: a taxing change

For almost half a century, most UK contractors have been paying their VAT retrospectively to HMRC every three months. But the upcoming changes that the introduction of the VAT reverse charges scheme brings are causing a stir among SMEs in the construction industry.

In 2017/18 HMRC reported a VAT gap of 9.6%, or £13.3bn in uncollected debt in the UK, alongside the increase in fraudulent activity and businesses ‘disappearing’ before passing the VAT funds they have collected to HMRC.

As a result, the government is rolling out a scheme where construction industry suppliers will no longer collect VAT from their customers. Instead, they will pay the VAT on any sales invoices raised directly to HMRC.

Similarly, when making purchases of VATable supplies from registered construction industry suppliers, they will only be required to pay the net amount of the bill, leaving the VAT portion to be paid by the supplier.

So, is this a good or bad thing for the construction industry?

Contractors will have to be mindful that they will need to pay the VAT at the point when the sales invoice is raised. This is instead of saving the money and sending the cash when submitting their VAT returns up to four months after the transaction takes place – as they do currently.

However, when it is necessary to purchase large amounts of supplies from VAT-registered suppliers, they will be paying 20% less. As a lot of supplies are bought prior to receiving any money from customers, this may have a positive impact on an SME’s cash flow.

As a side note, any supplies purchased from non-construction registered companies cannot participate in the scheme – this means that the VAT on sales currently used to cover the VAT on office, vehicle and overhead purchases, will not be available to use. This will be claimed back at the end of each three-month period.

Contractors and subcontractors who use the VAT collected to manage their short-term cash flow might take a hit. This is because the money will not be available to them to smooth out the peaks and troughs, associated with any business reliant on an irregular income, in a market affected by so many unstable factors. It is therefore key that they work out a way to manage their short-term cash flow efficiently.

This issue may be further compounded if contractors ‘under-certify’ works, as this could reduce payments to subcontractors. This will likely tighten cash flow further down the supply chain which could result in an influx of claims and disputes.

How can BWL help?

At present, the changes are due to come into effect in October 2020, and it's unlikely that everyone will be prepared for them.

BWL’s Construction Consultancy Services Team has vast amounts of experience in helping contractors of all sizes manage and maximise their contracts and processes.

To help reduce the exposure to cash flow risks associated with the VAT changes and other industry factors, BWL can support subcontractors with submitting valid applications for payment as part of a wider project. This will ensure that payment schedules are complied with and that the payment mechanisms within the contract are fully understood and adhered to by all stakeholders.

Additionally, BWL can offer support to subcontractors when they are presenting their substantiation in accordance with the contract for payment. This will help maximise monthly valuations from clients.

However, when a dispute crystallises, particularly around payments, BWL’s Legal Services Team is on-hand to step in and offer formal dispute resolution services. Both teams work together collaboratively with clients to get the dispute resolved as quickly and smoothly as possible.

Meet the team...

Graeme Cochrane is Director of Construction Consultancy Services at BWL Consulting.

Graeme is a Chartered Civil Engineer and Chartered Surveyor and brings large amounts of value to the team. He is experienced in offering support and guidance to businesses in construction and engineering. He is happy to talk to you about your requirements, and offer advice and support over a free consultation.

Request a call from him today by clicking the button below and completing the online form.

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