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2020 / 2021 Edition

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One-year delay to VAT reverse charge

VAT reverse charge delay

JCB Finance stress the extra time should be used to prepare for the change, not ignore it

WITH less than a month to go until its planned implementation, the Government has announced a delay to the introduction of the VAT reverse charge to UK construction until October 2020.

Industry representatives ,including the Construction Products Association and the CBI, had raised concerns that some businesses in the construction sector are not ready to implement the charge for building and construction on 1 October this year.

To help these businesses and to give them more time to prepare, HMRC has delayed the introduction for a period of 12 months until 1 October 2020. This will also avoid the changes coinciding with Brexit.

JCB Finance say the one-year extension will be a welcome relief to customers, after a recent survey of 2,600 of their customers with active lending found that 87% of respondents would be affected by the new regulations and that 40% of respondents had made no preparations whatsoever to amend their accounting systems, pricing models, contract content or cash flow predictions.

Among other key findings, 48% of survey respondents were not (until being contacted by JCB Finance) aware of the impending change, 57% said their systems would not be ready for the change and 42% indicated the likelihood of the change having a negative impact on cash flow.

JCB Finance’s finance director, Rob Heldreich, said: ‘On introducing such a big change like this, one of the biggest challenges HMRC will face is to make sure that all businesses affected are well informed and equipped to deal with it.

‘Many in construction, particularly smaller contractors, have simple accounting systems and do not regularly engage with accountants and tax advisors.

‘Our research matched that of key trade bodies, showing that businesses are not prepared for such a large change – therefore this extension should be used to better inform businesses on how to prepare.’
 
JCB Finance say that as well as gaining a greater understanding of what the VAT reverse charge is and whether an organization is affected, it is also crucial that business owners understand the likely impact of the changes so they can make the necessary preparations. Some of the key issues include cash flow, system changes and contracts.

Critically, as the JCB survey highlights, more than two in every five organizations could see detrimental effects on their cash flow as they may no longer receive VAT on sales invoices and will, therefore, not have use of those funds prior to making their quarterly VAT payments over to HMRC. This effectively represents a loss of working capital equivalent to 20% of a firm’s turnover for up to three months.

Also, despite the fact that 40% of respondents had made no preparations whatsoever to amend their accounting systems, pricing models, contract content or cash-flow predictions, each of these aspects will be affected.

For example, invoicing software will need to be able to show the required detail (such as itemizing what VAT is applicable to and at what rate) but not actually charge it – while some invoices still may need to charge the VAT.

JCB Finance say not all accounting processes and software will have the flexibility to accommodate all scenarios and specific training may be required to guide individuals involved in the invoicing process through the new regulations.

Moreover, where contracts are used, a business’s VAT status and that of its customer may need to be updated and considered on future contracts. From the moment the new regulations come into force they will apply immediately from that point forward – applying to any invoices with that tax date or thereafter – irrespective of when any existing contracts or agreed pricing agreements were entered into.

‘The Chartered Institute of Taxation estimates that 150,000 businesses will be affected by the new VAT reverse charge regulations,’ said Rob Heldreich. ‘We are informing our customers and supporting them through this transition. It’s at times like these, facilities such as JCB Finance’s HP Plus Hire Purchase agreement, which allows customers to take a payment holiday at short notice, really come into their own.’

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