CIS VAT is Changing Next October: What Does This Mean for You?

Originally planned for this October, HMRC has put in place a change to VAT accountancy via a reverse charge for the construction industry. These new changes have been established to crack down on VAT fraud, as well as to reduce the risk placed on the exchequer by labour supply chains.

So, what do these changes mean, why were they pushed back, and how can you prepare for them before their October 1st, 2020 introduction?

What Are The CIS VAT Changes?

Essentially, the changes mean all VAT payments from construction firms will need to be reverse charged. This means the construction industry will be accountable to HMRC for VAT on purchases as opposed to the supplier, preventing the possibility of VAT fraud occurring.

The construction industry will soon see their earnings and cash flow constrict as there will no longer be time between where VAT money is received and when payment to HMRC is due.

However, what is reverse VAT? When a reverse charge is applied to VAT, a recipient of said goods or services has to make a declaration that the input VAT (the purchase) and the output VAT (the sale) is clearly recorded in their VAT return. As such, HMRC can track exactly how much of its money is changing hands, and what it is properly owed.

In plain English, HMRC wants to cut down on the theft of VAT by construction industry suppliers. A reverse charge is the easiest way to prevent that.

How Does This Effect Development Finance?

The restricted cash flow of the construction industry presents an opportunity for development finance. To react, the construction industry must find new forms of finance to finish off projects and ensure there is ample supply for their workforce.

So, ahead of its introduction in a year’s time, it is prime season for property development firms to build up profitable relationships with construction firms.

Why Were The Changes Pushed Back?

Following appeals from the Chartered Institute of Taxation (CIOT), HMRC pushed back the proposed changes to October 1st, 2020. Explaining the change, HMRC stated:

“Industry representatives have raised concerns that some businesses in the construction sector are not ready to implement the VAT domestic reverse charge for building and construction on 1 October 2019.

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

Construction firms felt as though the October 1st, 2019 deadline was far too soon, especially given difficulty surrounding supplier contracts, payments and the ever-uncertain prospect of Brexit.

Concerned Over The Reverse Charge Changes?

If you’re working in the construction industry and are keen to build a relationship with a commercial financer, or if you’re concerned about how the new change will affect future projects and are seeking development exit finance, get in touch with us.