Following last month’s article on the looming train wreck of the VAT Reverse Charge on Construction, HMRC has just announced that its implementation is to be delayed by a year to October 2020.
On Friday 6 September, HMRC surreptitiously dropped Revenue & Customs Brief 10 (2019): Domestic Reverse Charge VAT for Construction Services - Delay in Implementation, announcing that the rollout would be postponed until 1 October 2020. HMRC said that was in response to concerns raised by industry representatives that 'some' businesses (i.e., most businesses, according to the Federation of Master Builders) were not yet ready for the original 1 October 2019 deadline, so the delay was to give them more time to prepare - oh, and it would also avoid the changes coinciding with Brexit. HMRC went on to say that:
"[HMRC] will also work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses will be ready for the new implementation date.
HRMC recognises that some businesses will have already changed their invoices to meet the needs of the reverse charge and cannot easily change them back in time. Where genuine errors have occurred, HMRC will take into account the fact that the implementation date has changed.
Some businesses may have opted for monthly VAT returns ahead of the 1 October 2019 implementation date which they can reverse by using the appropriate stagger option on the HMRC website."
HMRC also said in its Brief that there had been a long tead-in time for the measure, ostensibly to give ample time for businesses to prepare, but this really only compounds HMRC's failure to publish its essential guidance until June this year - less than 3 months before the original implementation date!
In its Brief, HMRC warned that it "remains committed to the introduction of the reverse charge and has already increased compliance resource", having put in place "a robust compliance strategy for tackling fraud in the construction sector, using tried and tested compliance tools"; also that "HMRC will focus additional resource on identifying and tackling existing perpretators of the fraud" in the year up to 1 October 2020".
This begs a question: is this measure actually going to work, or not? Because if it is going to work, then why would it have been necesary or appropriate already to have increased compliance resource? I fear I know the answer, and I suspect that if construction businesses understood, they would find it very difficult to stomach.
The previous article - Building Confusion in the Construction Sector - goes into much more detail, but to summarise:
- The new regime further complicates VAT in construction - already one of the most complex areas of VAT
- HMRC is well aware that the regime will place significant administrative burdens on VAT-registered businesses in the construction sector
- HMRC is also aware that it will cause signfiicant cashflow businesses for many businesses caught up in the new regime
- The number of businesses potentaily affected by the new measure is vast - there are roughly a million construction businesses in the UK, around 99% of which are SMEs, according to the Federation of Master Builders
HMRC says it hopes to safeguard around £80million a year by introducing the reverse charge. This is a substantial sum of money, granted, but if one measures that against the disruption and cost of the rew regime to almost a million businesses, it becomes practically microscopic.
In its July letter to the Treasury, the Federation of Master Builders had warned that failure by HMRC to prepare the sector for the new regime could result in insolvencies. While I defer to the FMB's experience, I suggest that this measure will cause severe business difficulties and even insolvencies whenever it is introduced. I am aware of businesses in the construction sector with turnover in the miilions but with net proit margins of significantly less than 5%. The loss of VAT cashflow when margins are so tight (and particularly where inward VAT costs are so high) could easily put them under, even if cashflow is not the same as profit.
The abuse involved will doubtless be conducted by a relatively tiny percentage of construction businesses - the business literally has to 'disappear' as part of the process. But HMRC's solution ensures that almost one million other businesses will suffer as a result. And of course there are penalties for failing to observe the new regime.
- Has this increased compliance resource already introduced been put there to catch out the hitherto law-abiding construction businesses that HMRC knew were going to struggle with the new regime? If so, that would be adding unforgivably profiteering insult to grievous injury. "Thanks awfully for not being proper villains: have a few penalties for your efforts."
- If HMRC already has such resources to spare, and/or if the new regime cannot work without them, then could it not have simply applied that additional resource - using "tried and tested methods" - to just catching the tiny minority of missing traders in the first place; in other words, before dreaming up a collective punishment of this magnitude?