VAT changes to affect supply chain

A new way of dealing with VAT by suppliers and subcontractors in the construction industry was due to apply from 1 October 2019, but has now been put back to 1 October 2020.

A coalition of 15 construction associations asked the Chancellor to delay the implementation to fully assess the effect on the construction industry and to provide enough time for businesses to get adequately prepared. As a result, HMRC announced on 6 September that the implementation date would be put back to the aforementioned date.

Tier 1 contractors will no longer pay VAT to their supply chain, but will pay HMRC directly. The main effect on suppliers and subcontractors is to deprive them of the value of the VAT (currently 20%), which they receive from the main contractor, and acts as a short-term loan until they pay the VAT to HMRC themselves.

The reverse charge will apply to payments that are required to be reported through the Construction Industry Scheme. The scheme could lead to an increase in building costs.

In a worst-case scenario, this could put suppliers and subcontractors in jeopardy if they have no other means of increasing cashflow.

For further information, click here: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services