domestic reverse charge scheme
...put back to Oct 2020
If you drive for work, you already know how tricky it is to pull off a U-turn in reverse in heavy traffic. Nevertheless, that’s exactly what HMRC’s just done with its flagship “domestic reverse charge” scheme for VAT.
The idea of the scheme was to crack down even further on dodgy dealing in the VAT world by changing how that VAT is charged. Under the “domestic reverse charge” system, subcontractors would no longer charge VAT to the contractors they work for. Instead, the contractors themselves would be lumped with the job of reporting the input and output VAT in their own VAT returns. That way, HMRC was hoping to kill off the old “missing trader” scam, potentially clawing back the £100 million or so supposedly being lost by the taxman each year.
The missing trader scam, if you don’t know it, is when a subcontractor basically vanishes with the VAT they’ve charged, probably popping up later under a new name. HMRC’s been set on chasing down this kind of fraud for a while, and the domestic reverse charge was seen as a major weapon in the VAT war.
So, with the October deadline looming for the kick off of the new scheme, subcontractors were madly running around trying to figure out what it all meant. For many of them, it looked like being a serious blow. Over 150,000 construction businesses, for example, looked set to see an instant 20% drop in their cash flow. With margins being squeezed throughout the industry, that’s more than enough to put smaller firms under serious threat. On top of that, you’ve got the current Brexit turmoil reaching fever pitch at the end of October and a raging shortage of skilled labour that just keeps building.
So, here’s where the U-turn comes in. Faced with an industry that, frankly, wasn’t getting the support it needed to cope with this severe rules change and the cash flow nightmares that come with it, the government has pumped the brakes on the domestic reverse charge. In fact, it’s kicked the can a full year down the road with a new start date of the 1st of October 2020.
Obviously, this isn’t the full-on cancellation of the scheme that a lot of people were hoping for. However, it could mean some vital breathing space for getting your VAT ducks in a row before the chaos hits again. As always, our best advice on managing cash flow is to think ahead, plan carefully and never leave your cash on HMRC’s table. RIFT Accounting is here to steer you safely through the taxman’s tangled rules. We’re always up to date on the latest regulations, thresholds and deadlines, and we’re always ready to help. Get in touch to see what we could do for you, and keep listening out for more Voices from the RIFT…