Reverse charge VAT for construction services has been delayed by 12 months, less than three weeks before it was due to take effect.
Back in June 2019, we compiled a newsletter saying the way VAT is collected in the construction and building industry was changing from 1 October 2019.
However, the Government announced last Friday that the measure will not come in until 1 October 2020.
The motivation behind the delay was to help around 150,000 businesses prepare, and avoid the measure clashing with the UK's scheduled departure from the EU.
Victory for campaign groups
This week's announcement has been welcomed by industry campaigners, who united to lobby the Government for a delay.
Mike Cherry, chairman at the Federation of Small Businesses, said:
"With small construction businesses already suffering due to unprecedented uncertainty, slowing growth and rising costs, this [1 October 2019] was clearly not the right moment to hit them with the reverse charge.
"Rollout of this change without due care would have made a bad situation worse, restricting cashflow and threatening the futures of many businesses."
The Chartered Institute of Taxation (CIOT), which led a prolonged campaign to delay the reverse charge until 1 April 2020, were delighted.
The CIOT wrote to HMRC on 29 July 2019, claiming that large volumes of its members were unaware of the change.
It also cited research claiming that 69% of businesses affected had not even heard of the reverse charge.
Linda Skilbeck, vice-chair of indirect taxes sub-committee at the CIOT, said:
"There is substantial evidence of a lack of awareness of this change, and a lack of preparedness even among those businesses who are aware of it.
"If the Government had pressed ahead with a start this October, we envisaged significant confusion among businesses, leading to disputes between suppliers and customers as to whether or not VAT should be charged.
"A start date of October 2020 is more sensible. This should allow time for a dedicated information campaign."
Brian Berry, chief executive of the Federation of Master Builders, hailed a "sensible and pragmatic decision".
"To plough on with the October 2019 implementation could have been disastrous given that the changes were due to be made just before the UK is expected to leave the EU, quite possibly on no-deal terms," he said.
Reverse charge VAT for builders - recap
The domestic reverse charge VAT for construction and building services, to use its full name, aims to crack down on fraud.
More specifically where some builders charge for VAT at 20% for construction services they had supplied - and then pocket the VAT instead of paying it to HMRC.
The reverse charge will apply to transactions between VAT-registered contractors and subcontractors registered under the construction industry scheme (CIS).
These contractors or subcontractors can be companies, partnerships or sole traders, while the measure will apply to standard and reduced-rate VAT supplies.
Use the extra time wisely
Reverse charge VAT for construction services is not going away.
It would be wise to ensure any accounting systems are capable of handling the change over the next 12 months, including dealing with suppliers' invoicing needs.
Review any supplies provided to and received from other VAT-registered contractors to what is likely to be liable to the reverse charge.
Where possible, obtain details of any customers VAT-registration status, CIS status, and confirmation they are the end-user.
Preparing long-term cashflow projections in case VAT is erroneously collected or paid to HMRC should also be on the agenda, as well as plans to mitigate that.
HMRC is expected to crank up its communication of the measure, unless the UK's divorce from the EU rumbles on well into next year.
We can help with any aspect of VAT.