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Home Latest News VAT Reverse Charge - Welcome Delay Until October 2020

VAT Reverse Charge - Welcome Delay Until October 2020

With less than a month to go the Government has announced a delay to the introduction of the VAT Reverse Charge to UK construction until October 2020.

The one year extension will be a welcome relief to JCB Finance customers who in a recent survey of 2600 customers with active lending, showed that 87% of respondents would be affected by the new regulations and that a surprising 40% of respondents had made no preparations whatsoever to amend their accounting systems, pricing models, contract content or cash flow predictions. The survey held ahead of the scheduled introduction highlighted the impact of the change and that work still needed to be done to inform businesses.

JCB Finance’s Finance Director Rob Heldreich states “On introducing such a big change like this, one of the biggest challenges HMRC will face is to make sure that all businesses affected are well informed and equipped to deal with it. Many in construction, particularly smaller contractors, have simple accounting systems and do not regularly engage with accountants and tax advisors.

THE IMPACTS OF VAT REVERSE CHARGE

As well as gaining a greater understanding of what the VAT Reverse Charge is and whether an organisation is affected, it is also crucial that business owners understand the likely impact of the changes so they can make the necessary preparations. Some of the key issues include:

Cash Flow

Critically, as the JCB survey highlights, more than two in every five organisations could see detrimental effects on their cash flow as they may no longer receive VAT on sales invoices and will therefore not have use of those funds prior to making their quarterly VAT payments over to HMRC. This effectively represents a loss of working capital equivalent to 20% of a firm’s turnover for up to three months.

System Changes

Despite the fact that 40% of respondents had made no preparations whatsoever to amend their accounting systems, pricing models, contract content or cash flow predictions, each of these aspects will be affected. For example, invoicing software will need to be able to show the required detail (such as itemising what VAT is applicable to and at what rate) but not actually charge it – while some invoices still may need to charge the VAT. Not all accounting processes and software will have the flexibility to accommodate all scenarios and specific training may be required to guide individuals involved in the invoicing process through the new regulations.

Contracts

Where contracts are used, a business’s VAT status and that of its customer may need to be updated and considered on future contracts. From the moment the new regulations come into force they will apply immediately from that point forward – applying to any invoices with that tax date or thereafter - irrespective of when any existing contracts or agreed pricing agreements were entered into.

Rob Heldreich said: “The Chartered Institute of Taxation estimates that 150,000 businesses will be affected by the new VAT Reverse Charge regulations. JCB Finance are informing our customers and supporting them through this transition. At times like these, facilities like our HP Plus Hire Purchase agreement, which enables customers to take a payment holiday at short notice, really come into their own.”

The survey was carried out by JCB Finance in August and was issued to construction related companies ranging from micro organisations to PLCs.



*JCB Finance provides asset finance including Hire Purchase facilities for UK businesses but is not a tax or financial advisor – always seek advice from your accountant or tax advisor because every business’s circumstances are different.