When the construction VAT reverse charge ruling comes into place on the 1st of October 2019, UK construction companies need to be prepared or there may be dire consequences.
This ruling was originally announced in 2017 in an attempt tackle fraud within the construction industry. The existing process of suppliers receiving VAT from their customers and then being accountable to HMRC to declare and pay the VAT over has proven to be flawed.
The principle Issue is that some less than honest suppliers were receiving money under the guise of VAT but failed to declare it or indeed pay it over to HMRC. The estimated losses to HMRC reaching almost £100 million per year. During a time when HMRC were ranked as an unsecured creditor in the event of an insolvency this is a figure they felt need to be addressed.
The new ruling will see the customer becoming liable for paying the VAT over to HMRC rather than the supplier. This they believe will see the “Missing Trader Fraud” figure significantly reduce. The knock on effect within the construction industry will be harsh, making it even more important for sub-contractors and SME construction companies to start working smarter, working to contract and applying for payment correctly. This will give their customer greatly reduced ammunition not to pay them. It is estimated that close to 150,000 companies will see their cash flow directly affected. Added to that, the costs in larger companies of implementing a system to manage the process, some serious thought needs to be done to prepare for this change.
With the current VAT rate being 20% it is easy to predict that the minimum hole in cash flow could be the same if preparation fails to be made to deal with this new ruling.
It seems generally, not many companies are preparing for this change and it is hard to find any clear online guidance to assist with this change.
The Federation of Master Builders is always a good place to gauge changes in the construction industry, their recent figures indicate 69% of SMEs in their sector were not aware of the changes and only a third of those that are aware of the change are actually preparing for it.
If you are concerned about the new process and how you should account for it then an initial chat to your accountant will get you started. In respect of cash flow, credit control and processes for getting paid on time, contact the ICM Group for a free no obligation chat..
