Accountants urge businesses to ‘get ready now’ for the domestic VAT reverse

By Nick Batten on 21 January, 2021

Accountants at Swindon-based Optimum Professional Services have advised that the domestic VAT reverse charge for construction is on course to be introduced in a few weeks and businesses need to prepare now.

The rules, which come into force on 1st March, will apply to all businesses registered for VAT that are in the construction sector, irrespective of size.

Michael Blaken, Accounts Director at Optimum, said, “The domestic reverse charge for building and construction services was originally planned to come into force in 2019 but was delayed twice. However, it is now on course for the 1stMarch introduction. The rules around the VAT Reverse Charge are complicated, so the sooner businesses prepare the better.”

A domestic reverse charge means any business customer receiving supplies of construction services, subject to the Construction Industry Scheme, must account for the VAT due on these supplies on their VAT return, as opposed to the supplier doing so. This follows similar measures introduced in other sectors and is an attempt to remove the scope for VAT fraudsters.

Michael continued, “Businesses need to adapt their accounting systems for dealing with VAT. Also, there will potentially be a negative impact on the cashflows, primarily because businesses will no longer get VAT payments from customers for services where the reverse charge applies.

“Contractors will also need to review their contracts with sub-contractors, to decide if the reverse charge will apply to the services received under the contracts. If they do, suppliers will need to be notified.”

One key issue for concern is that the 1st March start date is so close to the 31st March deadline set for paying VAT arrears (under the financial measures introduced to help businesses through the pandemic).

Any VAT deferred during the VAT payment holiday between 20th March and 30th June last year will be fully due by 31st March, potentially further exacerbating cash flow issues. Although a new system is being introduced to split the deferred VAT from 2020, across 12 smaller payments up to 31st March, 2022.

Michael added, “Depending on individual circumstances, it may make sense to opt for monthly VAT returns or, in other cases, to leave the VAT flat rate scheme. All this needs deciding upon and putting in place before 1st March – which is only a few weeks away.”

For help and advice with the new VAT reverse charge or any support with tax and accounting, please get in touch with Optimum: email info@opts.co.uk, call 01793 538 198 or visit https://www.optps.co.uk/.

Pictured above: Michael Blaken, Accounts Director at Optimum