VAT change to increase costs in property and construction sector

Philip Hammond’s announcement that VAT responsibility will shift up the supply chain could cause an administrative headache and extensive additional costs, according to John Voyez, VAT partner at Smith & Williamson.

The Government plans to introduce a domestic VAT ‘reverse charge’ from 1 October 2019, following a consultation on tackling fraud in construction industry labour supply chains.

The reverse charge will shift responsibility for paying VAT along the supply chain, with the aim of preventing VAT losses.

The measure will effectively mean that the business recipient of the labour supplies will become liable to account for the VAT under the reverse charge arrangements. The long lead-in before implementation is to provide businesses time to prepare for the change.

“Ultimately the VAT will be cost neutral so there will be less money sloshing around in the market. As a result, in terms of combatting VAT fraud, there are some admirable points. However, for those companies that are already law-abiding, it places an additional burden to track VAT and arguably makes them do the job that HMRC should already be doing,” said John.

“Businesses could be forced to hire additional administrative staff to stay on top of VAT. Larger businesses will likely be able to subsume the cost/activity within their existing administrative staff but mid-tier businesses could be heavily hit by the change. Hiring staff that are able to keep on top of the vast intricacies of VAT across numerous sites, and contractors, could prove costly.”

“Businesses will have to suffer this cost as it’s fairly unlikely the end user will want to see the price go up, so margins in the industry will become thinner.”

The change has been semi-successfully introduced in to other European states. However, these stats tend to just have a single rate of VAT which is paid. The UK has three rates: zero-rated, 5% and 20%. It will not be for the company giving out the contract to decide whether the work, or part of the work, falls in to what category.

“In the grand scheme of things this particular aspect may not have such a big impact. The companies giving the contract always did have the ability to challenge the VAT invoice. However, it does bring a level of additional uncertainty to the market which wasn’t there before,” said John.

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John Voyez

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