Domestic Reverse Charge
... Set Back Again
Remember the new “reverse VAT” rules that were originally supposed to bite on the 1st of October 2019? You know – the ones that were then pushed back by a year when it looked like over 150,000 contractors were set to get an instant 20% cash flow drop. Well, the kick-off date for the scheme has been moved again to the 1st of March next year – this time to help businesses cope with the fallout from the COVID-19 pandemic.
Just to jog your memory for a moment, the Domestic Reverse Charge is a vigorous shake-up of the way contractors and subcontractors handle VAT in construction. Instead of subbies charging VAT to their contractors, the new scheme sees the contractor stuck reporting the input VAT (what they’ve bought) and the output VAT (your sale) in their own VAT returns. The point of the system, apparently, is to strike a killing blow against so-called “missing trader” scammers. This is the situation where a subcontractor basically vanishes off the face of the Earth, along with the VAT they’ve just charged, popping up later under a new name. HMRC estimated that it was losing as much as £100 million a year to the scam, and decided that a big change in the rules was in order.
It’s worth mentioning that not every kind of work in the building trade is covered by the Domestic Reverse Charge. “End users”, for instance, won’t have to report and pay the VAT themselves. Of course, you’ve got to prove you count as an end user in the first place, which won’t always be easy with complicated projects. Also, the scheme only applies to VAT-registered businesses in most kinds of CIS work, with exceptions for things like:
The Domestic Reverse Charge isn’t setting out to screw additional cash out of people who are already playing by the rules. After all, honest subbies will have been passing the VAT on to HMRC anyway. Now it’s their contractor who’ll be doing that instead. There are still a few pitfalls and dodgy practices to steer clear of, though. The taxman will take a dim view, for instance, of subcontractors who still try to charge VAT in their invoices, accidentally or otherwise. There’s also the potential danger of being stung with the charge because you haven’t properly declared yourself an end user. Equally, it’ll be easy to get on the wrong side of HMRC by simply never realising the scheme applied to you in the first place.
As with the last deadline shift for the new system, this still falls far short of the total cancellation a lot of people were hoping for. Even so, with COVID-19 still tearing great chunks out of the UK’s economy and way of life, it’s a welcome bit of breathing space and a much needed chance to prepare.
As ever, the best way to keep your business kicking throughout the ongoing crisis is still expert guidance from RIFT. We’re always on the ball with the latest rule changes, and we’re always ready to help. Stay healthy, keep in touch and listen out for more Voices from the RIFT...