VAT reverse charge: HMRC hits the brakes

AAT Tax Policy Expert Brian Palmer writes:

"In a carefully worded brief issued on Friday afternoon, HMRC has postponed the introduction of the VAT domestic reverse charge for construction services for 12 months to 1 October 2020.

"Seemingly, and in spite of whatever views people have on the government’s approach to Brexit, in this area at least this appears to be a government that listens.

"In the brief, HMRC states: 'Government has listened to the concerns raised by industry representatives, and recognises that some businesses in the construction sector require more time to implement the VAT domestic reverse charge for building and construction on 1 October, and that this is close to the date the UK is due to exit the EU.

"'The government remains committed to the introduction of the reverse charge. HMRC has already increased compliance resource and put in place a robust compliance strategy for tackling fraud in the construction sector using tried and tested compliance tools. In the intervening year, HMRC will use the time to focus additional resource on identifying and tackling existing perpetrators of the fraud.

"'To help businesses get ready in the next 12 months, HMRC will continue to work closely with the construction sector to raise awareness and provide additional guidance and support to ensure all business will be ready for the new implementation date.'

"This slowdown to the introduction of what is a well-intentioned measure makes absolute sense. With much of the focus in the last year or so being on the delivery of Making Tax Digital for VAT, many software developers have not had the bandwidth to have their products ready to support those affected. This is particularly true given all the current uncertainty.

"When it eventually comes in, the VAT domestic reverse charge will mean UK customers who get supplies of construction services must account for the VAT due on these supplies on their VAT return, rather than the UK supplier.

"Its purpose is to reduce the leakage of VAT owed to HMRC, and follows similar measures introduced in response to criminal threats for mobile phones, computer chips, emissions allowances, gas and electricity, telecommunication services and renewable energy certificates."