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Daily Tax Report: International

INSIGHT: VAT on U.K. Construction Services

Oct. 2, 2019, 7:01 AM

The U.K. tax authority, HM Revenue and Customs (HMRC) issued its Revenue and Customs Brief on September 6, 2019 confirming that the VAT domestic reverse charge (DRC) rules for construction services will now take effect from October 1, 2020, rather than October 1, 2019.

What are the DRC Rules?

Under the DRC, responsibility for accounting and paying value-added tax (VAT) on qualifying construction services shifts from the supplier to the customer.

The customer has to “self-account” for VAT on their VAT return and will be able to recover the VAT subject to their usual VAT recovery position.

Objective of the DRC

Due to the way VAT is usually accounted for and paid to HMRC, in certain sectors this opens up the possibility of fraudsters being able to receive payment of VAT from their customers without then remitting the VAT to HMRC.

The property and construction sector is viewed as being at a higher risk. The DRC rules are, therefore, intended to reduce the VAT gap and missing trader fraud.

Why the Delay?

HMRC has stated that one of the reasons for the 12-month deferral to October 1, 2020 is due to the implementation date coinciding with Brexit.

Other concerns expressed by stakeholders in the property and construction sector have also been taken into account. These include whether affected businesses have had sufficient time to take action and prepare in areas where their cash flow will be negatively impacted.

Further, as the DRC affects how VAT is accounted for, many businesses will need to make changes to their systems and processes. For example, the tax codes for sales and purchase transactions may need to be changed and updates may be required to invoicing templates so that they include the correct VAT treatment and narrative.

Impact on Businesses

One of the main drivers behind the deferral was to give businesses more time to prepare. The year delay will give these affected taxpayers additional time to consider what impact the DRC rules will have and what changes are needed to remain compliant and to mitigate potentially adverse cashflow implications.

However, there will be some who have already sought advice and taken measures to ensure compliance with the original DRC implementation date of October 1, 2019. Those that have done so will be well-prepared for October 1, 2020. For businesses which have gone so far as to make system and process changes, HMRC has sought to reassure that, where genuine VAT accounting errors arise as a result, they will take the deferral into consideration.

Due to the change in the way VAT is accounted for under the DRC rules, for some businesses this would have impacted cashflow. Where businesses have changed their VAT return staggers (i.e. from monthly to quarterly or vice versa), they will be able to change it back using HMRC’s online services.

Planning Points

Even though the implementation date is now more than 12 months away, changes to systems and processes can require both time and financial resource. In addition, those businesses whose cashflow will be adversely affected may need to consider what options are available to them to help bridge funding gaps.

We therefore recommend businesses seek specialist advice to consider how they will be impacted by the DRC, what changes are needed to become compliant and what communications, if any, they need to enter into with suppliers and customers.

Robert Marchant is VAT Partner at national audit, tax, advisory and risk firm, Crowe.

The author may be contacted at: robert.marchant@crowe.co.uk

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.