The introduction of the domestic reverse charge for the construction industry is deferred again until 1 March 2021
The domestic reverse charge, referred to as the reverse charge, is a major change to the way VAT is collected in the building and construction industry.
The change was initially due to be introduced on 1 October 2019, but following industry pressure in light of Brexit and the negative impact it would have on the sector, this date was pushed back to October 2020.
Within the last seven to ten days, HMRC’s press office initially confirmed that that the new domestic reverse charge rules for the construction industry would commence on 1 October 2020. It was then announced that its introduction would be delayed until 1 March 2021. No doubt news of its deferment will be well received across the sector as its deals with the impact of Covid-19.
When it comes into effect on 1 March 2021, it means the customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier.
It will only apply to individuals or businesses registered for VAT in the UK (although it will not apply to consumers).
This will affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS).
Whilst these changes have been delayed, it is important to remember that they are still very likely to come into effect next year. Businesses are urged to use this period of grace to make sure they are fully prepared. In particular, concern is raised about the new timing of the scheme’s introduction as it is very close to the 31 March 2021 deadline for paying the VAT arrears deferred during the VAT payment holiday (between 20 March and 30 June 2020).
As such there is the risk of pressure on businesses cash flow as they get to grips with the new scheme and make up payments previously deferred. Therefore, it is important to consider the cashflow implications relating to the introduction of the new scheme.
Depending on the impact of the scheme on your business, there may also be a need to consider the timing of your VAT returns. Businesses that currently submit a quarterly VAT return may want to consider submitting a monthly VAT return instead, to help cashflow, if they are likely to be in receipt of recovered input tax.
Whilst the scheme’s introduction has been delayed by ten months, we would recommend that those who may be affected consider its impact beforehand to safeguard against any potential financial pitfalls.
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