Welcome delay to construction industry VAT changes

9 Sep 2019

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HM Revenue & Customs (HMRC) has listened to the concerns of industry bodies and the accounting profession and announced a one-year delay to the implementation of changes to the way that VAT is accounted for by property and construction businesses. The delay is a welcome move for the industry.

Sean McGinness, a partner and VAT expert at Saffery Champness said: “HMRC is correct to tackle fraud in the construction sector to reduce the tax gap. However, the drafting of the law and guidance has left many unanswered questions. This is why both the accountancy and construction industries lobbied HMRC for a delay to the implementation date.”

The new domestic reverse charge for construction services was due to come into effect on 1 October 2019. The lack of clarity surrounding the application of the law and HMRC’s guidance led to confusion, particularly for temporary recruitment businesses, housebuilders and those looking to rely on the connected party exclusions under the new rules.

For recruiters

“Although the supply of staff by employment businesses is carved out of the domestic reverse charge, some agencies have been struggling with the definition of ‘supply of staff’. Certain agencies were in a position that they would have to identify where a temp was working on a day-to-day basis, as some supply chains met the ‘supply of staff’ definition and others were supplies of construction services. It is hoped that the year’s delay will allow HMRC to clarify the application of the rules where a temp could be working on different projects.”

For housebuilders

“For housebuilders, the changes will cause difficulties in processes trying to capture when a housebuilder has received a standard-rated construction service that it re-supplies. This is where the housebuilder has disposed of its entire interest in the land.

“The issue is that housebuilders frequently forward sell certain plots on developments, including to registered providers, private rental sector developers and commercial property investors. These plots form part of a larger masterplan where the housebuilder retains an interest. HMRC suggest that developers have to consider on a plot-by-plot basis rather than whether an interest is retained in the overall development site in order to confirm whether the rules apply. This is very difficult for procurement teams who do not necessarily know that certain buildings or plots have been disposed of when ordering construction services, as sub-contractors work across the entire development and not necessarily on discrete plots. It is hoped HMRC changes its approach on this point before 1 October 2020.”

For rural businesses and landowners

“The main issue being faced by landed estates and the rural sector is around the interpretation of ‘connected parties’. Ordinary VAT accounting will continue to apply where the customer is an end user and certifies this to the supplier. However, there can be varying ownership structures on landed estates, which, for example might mean that one entity may buy in all repair and improvement services and then disburse these around the entities that own the land and properties. Unfortunately, this would seem to mean under current guidance that the entity buying in the services will not be an end user and will have to self-account for VAT before then invoicing the landowner with VAT, unless all entities are corporate bodies (ie not partnerships, individuals or trusts). This could lead to confusion and risk of non-compliance, as businesses should not accept invoices from suppliers that have VAT incorrectly charged. It is hoped HMRC addresses this point over the next 12 months to ease the implementation burden for the rural sector and its contractors.”

McGinness concluded: “It is to be hoped that HMRC engages with the industry and professional bodies over the next 12 months to understand the supply chains and scenarios that are in operation enabling improved guidance to be produced to provide clarity over the rules. It is important that the tax gap is reduced but legitimate businesses who are not involved in fraudulent supply chains need clarity on the application of the rules to avoid inadvertent and unnecessary risks. Saffery Champness will continue to raise issues with HMRC where further clarity is required.”

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