Major VAT Changes

Ardent Tide - CIS Contracting

MAJOR VAT CHANGES TO LEAVE SUBCONTRACTORS WITH CASHFLOW PROBLEMS

In recent months, HMRC have published draft legislation which means that from 1st October 2019, Subcontractors in the Construction Industry will no longer be required (or able) to charge VAT on construction services to their contractor clients.

The introduction of what is known as ‘VAT domestic reverse charge’ from 1st October 2019, means Subcontractors will only be required to notify their Contractor clients to self-account for the VAT that would otherwise be due for payment on the Subcontractors invoice.

The reason for this change is to reduce fraud often referred to as ‘missing trader’ and ‘carousel’ VAT fraud. These types of fraud have been steadily growing over the years and result in hundreds of millions of lost revenues to the Exchequer.

The cashflow consequences that arise from this new VAT change, however, are likely to have a serious impact upon the businesses of many subcontractors who rely on retaining the ‘temporary use’ of the VAT collected on sales invoices as working capital for their businesses. VAT collected on their sales invoices is only required in many cases to be paid over to HMRC one month + 7 days after the end of each VAT accounting quarter.

What could you do as a Subcontractor:

• Plan early and prepare a proper cashflow forecast to determine the likely additional cash (i.e. working capital) required for your business.

• Speak with your Client and negotiate earlier payment terms on your invoices.

• Speak with your suppliers and seek longer payment terms on their invoices.

• Reduce the company dividend / owners’ salaries outgoings until there is sufficient working capital accrued in the business.

• Input the additional required capital into the business.

Businesses will have to update their systems and procedures and staff will need to get familiar with how this will affect their business. This VAT reversal will have a serious impact on many businesses and some may inevitably fail. It is all very well to bring in this change but shouldn’t it be closely aligned to legislation leading to better payment terms in the Industry? Without improved payment terms, many subcontractors will struggle.

A Lesson from Ireland Construction businesses in Ireland will already be familiar with Reverse Charging as it has already been operating in Ireland for a number of years. Apart from the complexities and cash-flow difficulties, another downside has been the increased number of VAT reviews initiated. This is mainly down to the fact that many subcontractors now find themselves in a tax refund position. Claiming a

VAT refund tends to lead to a greater likelihood of being subject to a VAT review. We expect the same to happen in the UK once the new legislation takes effect.

The final version of the legislation will be published in October 2018 and will come into effect on 1 October 2019. Clients of Ardent Tide can be assured they will be kept up to date on any developments. In the meantime, if you have any queries on this you should contact your accountant in plenty of time to prepare for these significant changes.