• Sectors we work in banner(2)

    Quick Reads

VAT Reverse Charge for Construction: Now, never, later?

With only 10 days left of February, and the VAT reverse charge for construction due to come into force on Monday 1st March, it looks increasingly likely that the UK government is not going to postpone this significant tax change in the construction sector.

This is notwithstanding a very considerable snowballing recently of industry opposition to - at the very least - the timing of this significant change. Some may wish this change was "never", but "later" is clearly the preferred view of the sector to "now".

Build UK

has been leading the construction industry-wide campaign to raise awareness of the impact of the construction sector reverse charge, but all the major trade bodies wrote to the Chancellor back in early December 2020. An early day motion was tabled in Parliament on 8th February expressing concern at the decision of the government to go ahead with the introduction of the reverse charge for construction services at this time.

The Treasury estimate that the new reverse charge will generate additional revenue of circa £100m through better compliance and the avoidance of fraud, which is clearly an important aim. However, the risks of making this change to the industry as a whole (which has an annual GDP output of over £115bn) do need to be balanced against that aim, and in particular the impact the change may have on small and medium sized businesses (SMEs).

Whilst it is true that the introduction of the reverse charge for the construction sector has already been postponed previously, the timing now is seen as particularly challenging to the construction sector still grappling with the impact of a prolonged pandemic and Brexit. The changes mean that the construction supplier will no longer charge VAT on its specified supplies. The subcontractor receiving the supplies will be responsible for accounting for and paying any VAT due to HMRC. The change will have a particular impact on SMEs. It is estimated that the requirements for additional cash flow to meet the charge will equate to approximately 5% of annual sales for those companies that submit quarterly VAT returns and 3% for those that submit monthly returns, and many commentators have highlighted the cash flow risks to businesses otherwise just about trading their way through these challenging times.

One less commented on aspect of the challenge for SMEs in the construction sector arising from the reverse charge is that this is not the only significant tax change about to impact the industry. At the start of the new tax year on the 6th April, construction will also be impacted by material changes to both the Construction Industry Scheme and the IR35 off payroll changes. All of these changes will give rise to compliance headaches for businesses and lead to increased administrative costs in the short term, particularly for SMEs.

As a firm we are well placed to assist clients struggling with these issues. Hugh Gunson, a Legal Director in our Tax Disputes practice, has written about the IR35 changes here, and Helen Coward, a partner in our Corporate Tax team, has written about the Construction Industry Scheme rules changes here. Helen's article reviewing the application of the reverse charge in construction can be found here.

The introduction of the VAT reverse charge in March will have a huge impact on the financial stability of companies across the construction supply chain that comply with all their legal obligations.

The risk to companies, jobs and projects in both the public and private sectors is significant which is why build UK and its members are calling for the Chancellor to withdraw the legislation.

Suzannah Nichol MBE, Chief Executive Build UK

Our thinking

  • Charles Russell Speechlys advises Vitro on a major international restructuring project

    David Cordova Flores

    News

  • Property Patter: Spring Budget 2024

    Emma Humphreys

    Podcasts

  • How the abolition of Multiple Dwellings Relief affects Build to Rent

    William Marriott

    Quick Reads

  • Guide to EMI Share Options

    Robert Birchall

    Insights

  • A guide to Company Share Option Plans

    Robert Birchall

    Insights

  • Charles Russell Speechlys advises Development Partners International and Verod Capital Management on investment into Pan African Towers

    Adrian Mayer

    News

  • Property118 schemes for landlords – a mistake worth fixing?

    Hugh Gunson

    Insights

  • The Vermilion case: when is a securities option “employment-related”?

    Tessa Newman

    Insights

  • Danish tax authority wins "cum-ex" tax fraud case at the Supreme Court

    Hugh Gunson

    Quick Reads

  • Private Mergers & Acquisitions in the United Arab Emirates

    William Reichert

    Insights

  • Charles Russell Speechlys Luxembourg strengthens tax practice with the recruitment of David Cordova Flores

    Yacine Diallo

    News

  • Update on Tax Reporting for Trustees of Trusts with Canadian Connections

    Insights

  • UAE Ministry of Finance Clarifies Definition of Qualifying Income for Free Zone Entities

    Mo Nawash

    Insights

  • Property Patter: Spring Budget 2023

    Samuel Lear

    Podcasts

  • LexisNexis features Patrick Gearon FCIArb in its UAE Managing Partner Report

    Patrick Gearon FCIArb

    In the Press

  • Spring Budget - Corporate Tax

    Robert Birchall

    Insights

  • Updates to EMI Options in the Spring Budget 2023

    Quick Reads

  • VAT on fund management services

    Robert Birchall

    Quick Reads

  • Ageing the New Zealand Righthold way: is Leasehold Plus right for the UK?

    Sarah Wigington

    Insights

  • SDLT mixed use – a rare success for the taxpayer

    Insights

Back to top