This October, the government are planning to introduce changes to how VAT is paid in an attempt to reduce VAT fraud. Reverse charge VAT will mean that customers will pay tax directly to HM Revenue and Customs (HMRC) rather than to the supplier.
However, construction bodies are warning that this may cause chaos in the industry. In fact a dozen bodies have recently written to the chancellor Sajid Javid to delay the launch until April 2020, to avoid it having, “a significant negative economic impact on the industry, substantially increasing the burden on business and restricting cashflow.”
With the UK construction sector’s output declining for the third month running in July, reflecting lower volumes of work, further hits to construction firms cash flow could lead to them going bust.
UPDATE: In September, HMRC announced they would delay the launch of reverse charge VAT for 12 months, until October 2020.
How does reverse charge VAT work?
The Federation of Master Builders found in July that 69% of construction SMEs had not even heard of reverse charge VAT and 67% of those who have are not prepared for it. However, awareness seems to be growing with Google searches for “reverse charge VAT” doubling in July. So what is reverse charge VAT and who does it affect?
Reverse charge VAT only affects payments to customers registered for Construction Industry Scheme (CIS). Under the CIS, contractors deduct money from a subcontractor’s payments and pass it to HMRC. The deductions count as advance payments towards the subcontractor’s tax and National Insurance.
| Current Arrangements | Reverse Charge VAT | |
|---|---|---|
| Pay subcontractor +VAT |
£5,000 £1,000 |
£5,000 £0 |
| Total to Pay | £6,000 | £5,000 |
| Charge to main contractor +VAT |
£5,500 £1,100 |
£5,500 £0 |
| Total to Charge | £6,600 | £5,500 |
| Cash in business until VAT is payable | £100 (£1,100 – £1000) |
£0 |
| Pay HMRC VAT | £100 | £0 |
Whilst profit is not affected, VAT is often used to help cash flow issues, with firms using the VAT to pay bills between the time the cash is received and when the VAT needs to be paid to HMRC. Put simply, prior to reverse charge VAT coming into effect, a firm would receive £120 (£100 +£20 VAT), now they will only receive £100.
When should reverse charge VAT be applied?
The flow chart below shows when reverse charge VAT or normal VAT rules apply, so you can send the correct invoice.
How can finance help?
White Oak UK has a number of solutions that can help your firm cope with the upcoming changes.
Firstly, there is our short-term VAT loan. Customers can choose whether they wish for payments to be made directly to HMRC on their behalf, or to their account, but ultimately a VAT loan frees up capital for other business requirements, by spreading the cost over 3 months and offering a quarterly facility to meet these ongoing costs.
Our Business Development loan offers a longer-term solution with the ability to repay over 3 years. A long-term business development loan can help support you. We give you the capital you need up front, enabling you to invest in your business’s future. White Oak UK has the solutions that can help your firm cope with the upcoming changes and provide finance when you need it.
We’re there if you need equipment for a new project or just need to replace old plant. Our asset finance solutions enable you to spread the cost over the lifetime of the asset.
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