A major change to VAT in the construction industry could cause significant disruption to businesses unless it’s delayed, the Chartered Institute of Taxation (CIOT) has warned.

The VAT domestic reverse charge is set to come into effect on 1 October 2019, and will apply to VAT-registered businesses that supply or receive specified services under the construction industry scheme.

Under the new rules, the supplier of construction services will not be required to account for VAT, but will issue an invoice stating the service is subject to the reverse charge.

The recipient must then pay the VAT to HMRC, instead of to the supplier.

Around 150,000 businesses in the construction and building sector are expected to be affected, but a recent survey from the Federation of Master Builders found that 69% of construction SMEs have not heard of the reverse charge.

The CIOT has urged the Government to delay the implementation date to 1 April 2020, to allow for better publicity and give businesses more time to prepare for the change.

Linda Skilbeck, vice-chair of the CIOT’s indirect taxes sub-committee, said: “We believe there will be significant confusion among businesses in the early days of the change, undoubtedly leading to disputes between suppliers and customers as to whether or not VAT should be charged.

“Businesses may be unprepared for the cashflow implications of the reverse charge, potentially leading to financial difficulties and even insolvency in the worst cases.”

The new regulations will affect most businesses in the construction sector and whilst larger companies have the man-power to make the changes necessary the impact will be hardest for smaller companies.

We have published a guide to the reverse VAT charge which can be accessed from the link below.

INSIGHT Reverse Charge VAT

Or to read more from our Construction & Property Sector team:

Construction and Property