Reversing the charges

Editorial Type: Feature Date: 2020-12-01 Views: 634 Tags: Software, Construction, CAD, Accounting, ERP , Fraud , EasyBuild
EasyBuild prepares to implement the HMRC's delayed Domestic Reverse Charge

Missing Trader VAT fraud is not just a construction industry issue. It has been around for a while in other industries, but HMRC has decided that it's now time to focus on the 100 million or so revenues it claims is being fraudulently misplaced in construction by companies who collect VAT from their customers - and promptly disappear with the loot.

It's a simple concept but obviously profitable for the fraudulent trader, who charges VAT on construction services and collects it, but refrains from declaring it to HMRC. The Domestic Reverse Charge (DRC) is equally simple, in that it removes the ability of suppliers to charge VAT, instead asking the customer to self-account for the VAT on services received through its VAT return. The customer is then able to reclaim VAT as usual.

The new regime was due to start on October 1st 2020, but with other concerns occupying peoples minds right now it has been delayed until the 1st March 2021, which gives companies plenty of time to reorganise their accounting systems to handle it.

It might seem simple but there are numerous caveats. The DRC does not cover all construction services, and businesses need to know where and when it applies. It also does not apply to end users, as both the supplier and customer in the transaction have to be both VAT and CIS registered, with payments having to be reported under CIS rules and 'construction' services, which have to be included, subject either to 5% or 20% VAT. End user status is also questionable, as suppliers now need to ask their customers whether they are end users, and keep a record of their response.

Construction Services includes every element of a job along with materials and labour. As a quick guide this would encompass: construction; extensions; demolition; alteration or repair of buildings; installing heating; lighting; air-conditioning; ventilation; power supply; drainage; sanitation; water supply or fire protection systems; Internal cleaning and painting and decorating of buildings.

What it doesn't cover is the external manufacture of goods and the delivery and supply of such goods to the site and subsequent installation - however, you need to look in more detail at the provision of mixed services which may contain elements of both of the above.

If everybody complies in the correct way, the ability for 'missing traders' to step into the breach at any point in the line is eliminated, and the DRC retains its neutral status for the customer - both paying and reclaiming VAT costs as normal.

The role of EasyBuild
There are a number of steps that EasyBuild customers need to take to make sure they are fully compliant with DRC before the due date. The first of these is to talk to EasyBuild and be reassured that neither they, nor their customers - wherever they are in the supply or contractor chain - will be out of pocket subsequent to implementation of the new regime.

The second step is to familiarise themselves with the services that they provide which fall within HMRC's guidelines, a complete list of which can be found on the HMRC's website. EasyBuild, having already studied the extensive list, would be happy to give you a shorter yes or no, or advice on any ambiguous activities you provide for your customers.

The main requirement though is to modify the way in which VAT is accounted for within the various ledgers of the accounting system. Whilst a VAT charge is registered against the provision of a service, VAT payments are not received - but the VAT has to be included in monthly CIS reports.

This means that companies have to be particularly careful that any modifications made to their system to handle the new processes maintain accurate records of each transaction, and that the reduced cash flows do not impact their bottom line.

With cash flow being one of the biggest implications of the change, some companies may turn to VAT funding or invoice finance to help pay for outgoing costs while waiting for invoices to be paid by clients. This also highlights another endemic issue within the industry - the need to negotiate shorter payment terms with their suppliers, i.e. the length of time customers have to pay for their services.

Risk Assessments
If the changeover is not handled correctly there are substantial risks to both suppliers and customers. Incorrect assessments or under-declared VAT will incur penalties, and subsequent interest payments on top of the VAT charges if the errors are not resolved.

Should the supplier charge VAT in error, HMRC will overcharge the customer for DRC output VAT. It then becomes the responsibility of the customer to claim a refund from incorrectly charged VAT from the supplier - which of course is not good for healthy supplier and customer relationships.

To avoid all of this, companies affected by the new proposals will need to ensure that their accounting staff are brought fully up to date with the new regulations, and that applications handling contracts, invoicing, payments and VAT returns are all updated to handle DRC transactions. They will also need to make sure that procedures are put in place to mitigate VAT risks.

What happens if I get it wrong?
HMRC acknowledges that the changes that will come into play in 2021 will be significant for everybody across the industry, and in particular for small businesses, who will be the most heavily impacted.They say, however, that they will operate a light touch for genuine compliance mistakes within the first six-month period. Penalties will only be considered in this period if a company is found to be deliberately taking advantage of the new measures.

Implementation schedules
EasyBuild has a large customer base, many of whom will be affected by the new changes, and as part of their engagement with their customers they will be organising regular briefings to keep them up to date with the changes implemented in the software. As a construction software provider they were already prepared for the original Domestic Reverse Charge date, which was then postponed.

The Domestic Reverse Charge adds yet another hurdle for companies to overcome, alongside the difficulties of the COVID-19 pandemic which introduced the concept of furloughs for temporarily laid off staff, and numerous other financial relief schemes which helped to keep companies ticking over through the worst parts of the national lockdowns.

We are yet to see the effect of Brexit for companies with overseas contracts or who buy materials from abroad, but fortunately DRC is small beer in comparison, and once the modifications to accounting systems are put in place, it should cause few further problems for companies.