The reverse charge VAT scheme will come into force for the construction industry from the beginning of October 2019. With the changes imminent we explore the possible impact on the recruiters supplying staffing for the building and construction sectors and clarify what specialist recruiters in this area need to know.
The reverse charge is being implemented in an attempt by HMRC to combat missing trader fraud, a problem which has since been seen as an issue within the construction industry.
The change will have an impact on all VAT-registered construction businesses supplying construction goods and services to non-consumers. The biggest issue will be for contractors, sub-contractors and businesses where VAT collected has previously been used as working capital until such time as VAT has to be paid. Rightly or wrongly it has become commonplace for small and medium sized businesses to rely on VAT for cashflow but this change will mean that it is no longer possible. Construction businesses up and down the UK should be looking at their processes and planning ahead to prepare for the change and to ensure they are managing their cashflow.
How does reverse VAT work
In simple terms VAT cash won’t be exchanged within the supply chain in the way that it is currently. Companies will still issue a VAT invoice for their services but the invoice will state that their service is subject to the VAT reverse charge. The VAT for each job will still be calculated but only as a paper exercise. VAT will then only actually be charged by the end-consumer or business at the top of the supply chain.
The change and the recruitment industry
The good news for recruitment agencies working in the construction industry is that they will be out of scope of the scheme. However, recruiters specialising in construction should be aware of the change as it will impact many of the contractors they have working for them.
When a recruitment agency invoices a building company for staffing services VAT will still be included by the agency as it has in the past. The building company will have to pay the VAT but will not in turn be able to collect VAT from the client they are providing building services to.
The change could cause cashflow problems for construction firms and some may find it more difficult to settle their invoices on time. For agencies supplying construction firms then we would recommend taking the opportunity now to review processes, ledgers and credit limits in order to be fully prepared.
If you are a recruiter and you would like more information or advice on the VAT change then please get in touch with your account manager.
Please note that since this article was published the change has been delayed until October 2020. For news on the delay see here.