Many small and medium size construction firms have not had adequate opportunity to prepare for a major change in accounting for VAT, says a concerned Chartered Institute of Taxation (CIOT). This has led the CIOT to call on HMRC to delay the change by six months.
The CIOT set out its concerns about the construction industry’s readiness for the new VAT reverse charge to be introduced from 1 October 2019, in a letter to HMRC.1 Some 150,0002 businesses in the construction and building sector will be affected by the change. The CIOT hopes a delay will lessen the likely flurry of disputes between suppliers and customers as to whether or not VAT should be charged.
A recent survey3 by the Federation of Master Builders indicates that 69 per cent of construction SMEs surveyed have not even heard of the new reverse charge. CIOT members report a similar lack of awareness among SME construction businesses.
Linda Skilbeck, Vice-Chair of CIOT’s Indirect Taxes Sub-committee, said:
“We are concerned about the combination of a substantial lack of awareness, and lack of preparedness even among those businesses who are aware of the measures.
“We urge the Government to delay the current implementation date. A start date of 1 April 2020 is more appropriate. This should allow time for a dedicated information campaign to be operated by HMRC, with the assistance of industry and professional bodies. Such a campaign could include direct communications with businesses in the sector, particularly those registered for the Construction Industry Scheme, as well as improvements to the content and accessibility of guidance on GOV.UK.”
The aim of the domestic reverse charge is to combat missing trader fraud in the construction sector. The CIOT supports actions to tackle tax evasion. However, there must be a balance between countering fraud and disrupting genuine business, and the CIOT considers there will be considerable burdens to affected taxpayers from this lack of publicity.
Under the new regime, a VAT-registered business, which supplies certain construction services to another VAT-registered business for onward sale, will be not be required to account for VAT, but must issue an invoice stating that the service is subject to the domestic reverse charge. The recipient of the supply must account for the VAT due on the supply through its VAT return, instead of paying VAT to the supplier. The recipient may also recover that VAT amount as input tax, subject to the normal rules for claiming credit. Unlike other types of reverse charge, the value of such reverse charge services will not count towards the VAT registration threshold.
In the letter to HMRC on 29 July 2019, the CIOT expressed its concern that publicity and communications by HMRC about this significant change have been negligible (although HMRC have launched some webinars recently). The technical guidance was first published on GOV.UK only on 7 June 2019, when it was intended to be published at least six months ahead of the change. This remains a work in progress as there are areas where further clarity is required. Stakeholders, including the CIOT, have engaged with HMRC throughout the consultation period, although the anticipated level of publicity required to introduce the scheme has not followed. The GOV.UK pages titled ‘VAT for builders’ make only passing reference to the changes (with a hyperlink), and only under the sub-heading ‘Houses and Flats’, notwithstanding the fact that the reverse charge also applies to commercial works, points out the CIOT.
Linda Skilbeck said:
“We believe there will be significant confusion amongst businesses in the early days of the change, undoubtedly leading to disputes between suppliers and customers as to whether or not VAT should be charged. Many businesses will ring HMRC’s phone lines, which will need to be adequately resourced and trained to deal with these queries. At the same time, businesses and HMRC will be dealing with the implementation of Making Tax Digital, as well as the consequences of Brexit.
"As noted in the policy paper, businesses may be unprepared for the cash flow implications of the reverse charge, potentially leading to financial difficulties and even insolvency in the worst cases, as well as significant levels of business disruption even among larger companies.”
Notes for editors
1. CIOT’s letter was sent to HMRC on 29 July 2019 and can be found here.
4. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 18,400 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Media should contact: Hamant Verma on 0207 340 2702 / 07740 477374 and HVerma@ciot.org.uk
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