A leading Cumbrian financial adviser is urging the construction industry to act immediately over VAT changes being introduced later this year.

The VAT Domestic Reverse Charge will be brought in from October 1.

The new legislation will change how those in the construction industry supply chain account for their value added tax.

The changes will apply to businesses making or receiving specified services that are reported under the Construction Industry Scheme.

Alex Nicholson, Armstrong Watson VAT director, said: “Construction businesses will need to review every customer, supplier and contract to determine correct VAT treatment, along with changing invoicing procedures and legal documents too.

“Aside from the significant administrative burden this will create for construction firms of all sizes, the biggest issue will be the negative impact on cashflow for subcontractors.

“Materials suppliers are not included, so VAT will still have to be paid on materials purchased and claimed back through the VAT return but subcontractors will not have the use of the VAT paid to them by their customers for up to three months as they do currently and this could have a huge impact on business finances.”

The change in legislation is an anti-fraud measure designed to counter a practice where parties in the construction supply chain charge VAT to customers and then ‘disappear’ without remitting the VAT collected to the Her Majesty’s Revenue and Customs.

Armstrong Watson said that HMRC estimated the losses in unpaid VAT from the construction industry total around £100 million a year.

It has introduced similar fraud prevention measures in supplies of mobile phones and wholesale gas and electricity.

The reverse charge will not change the VAT liability or a particular supply, but effectively shifts the VAT accounting responsibility from supplier to recipient, who must account for output VAT on supplies received and, simultaneously, recover some/all of this to the extent allowed.

Mr Nicholson added: “Generally, every link in a supply chain, will be subject to the reverse charge where the supplies involve work to the fabric of a building.”

However, the end user is the recipient of construction services and will not be subject to the reverse charge if they use those services for any purpose other than making further supplies of specified services.

End users must provide a declaration to their suppliers which clearly states their position and permits the charging of VAT, without this the reverse charge applies.

Mr Nicholson said: “This change is unusual in the VAT process, as in other situations certification is usually needed to avoid being charged VAT, not to ensure it.”

However, the new rules do not apply to contractors dealing directly with non-VAT registered customers and for contracts that are zero rated such as building new dwellings.

Mr Nicholson added that it was crucial that any businesses which believed it would be affected by the changes should take advice and act immediately as HMRC has confirmed it will penalise non-compliance of the new legislation.