As we mentioned in our previous piece on the reverse VAT charge, the implementation of the rules will have a serious impact throughout much of the construction industry.
The greatest impact will be felt by small sub-contracting firms who, essentially overnight, will see an important element of their cashflow disappear. As the vast majority of the type of services these small companies render fall under the remit of the rules, they will no longer be able to charge VAT on services they proffer.
The fear is that the impact of this cut to cashflow at this time could be severe for many sub-contractors, when combined with issues such as the ongoing effect of COVID-19 and post-Brexit teething issues that many are experiencing sourcing supplies from the EU.
This could see an impact on the solvency of many small sub-contractors, potentially leading to increased difficulty with settling invoices on time, something that could have an impact further up the supply chain.
This will be a worry for bigger construction firms and other parties who engage the services of sub-contractors. Other than this, the central concern for these parties will be preparing for the new rules coming in and ensuring compliance when they do.
In order to ensure compliance, new processes may have to be implemented, or existing ones amended, as the invoicing of services from sub-contractors will be fundamentally different when the new rules come in.
HMRC has said that it will use a “light touch” in dealing with genuine errors that occur within the first six months of the reverse charge coming in, providing that all involved are attempting to comply with the rules and are acting in good faith. However, after this grace period, and in instances of wilful non-compliance, penalties will be imposed.
Elsewhere, recruitment agencies in the construction sector will be glad to hear that the new rules will not apply to them as HMRC does not consider the simple supply of staff to to be the supplying of construction services, even if the staff are engaged in construction.
However, while recruiters will continue to charge VAT in the same way, they should be aware of the impact that the changes may have on contractors that they work with.
Author: Steven English