New “reverse charge” will reduce firms’ working capital says Clarke Willmott
UK construction companies face financial disruption when new anti-fraud VAT legislation comes into force in October.
The new legislation seeks to combat what the government describes as an attack on the VAT system by “organised criminal gangs”.
“The new VAT reverse charge for the construction industry is intended to tackle the issue of construction employers and contractors paying fees for works and services plus VAT, and then that VAT not being paid to HMRC in its entirety,” said Zoe Stollard, partner at national law firm Clarke Willmott specialising in the construction industry.
Under the new rules, the company receiving the services may be required to account for the VAT itself, rather than paying the VAT to the supplier.
“While anything that stops unscrupulous traders from effectively stealing VAT is to be applauded, it should also be noted that the new law’s implementation is going to have serious consequences for all construction firms whether they operate within the rules or not,” continued Zoe Stollard.
“For example, construction businesses which make an onward supply of construction services themselves will be forced to adapt their existing accounting systems to process this reverse charge which could well create cash flow issues, especially as they can no longer use the VAT collected from customers as working capital before it is paid to HMRC.”
Clarke Willmott and accountancy firm Milsted Langdon have been holding seminars to alert construction firms about the coming legislation and highlighting what it could mean to their financial position.
Julian Borley, Milsted Langdon’s Director of VAT, said: “HMRC believe that organised criminal gangs are exploiting the current rules.
“They provide the construction works to bona fide contracting business and are paid for their services plus VAT.
“However, the VAT collected is not paid to HMRC and the fraudulent business disappears before HMRC realise that there is an issue.
“This presents a risk to the genuine business as HMRC’s only recourse is to argue that the amount charged by the fraudulent business is not actually VAT and cannot therefore be recovered by the genuine business.”
Zoe Stollard explained that one of the unintended consequences of the new rules is that it will be detrimental to most sub-contractors’ cash flows.
“The tax point for construction services usually means that contractors are paid the VAT on their services before they have to pay the VAT to HMRC,” she said.
“Most businesses have to account for VAT on a quarterly basis, meaning some businesses have been paid VAT up to three months before it is due to be paid to HMRC.”
“It is common practice within the industry for this money to be used to buy building materials and pay for expenditure.”
“Businesses further down the supply chain need to realise that this benefit will be taken away from them with the introduction of the reverse charge.”
Julian Borley added: “There are just five months to go until this new law is brought in by HMRC and, even though there will be a settling in period, it is vital for construction companies to start preparing for this important change to their working practices and, where at all possible, take appropriate professional advice.”