UK trade associations are backing an Early Day Motion (EDM) in Parliament expressing concern over the Government’s introduction of its Reverse Charge VAT legislation from 1 March 2021.
The EDM, proposed by Scottish National Party MP for East Renfrewshire, Kirsten Oswald, “notes that this is of great concern to small and medium sized firms in the construction industry, who are still reeling from the impact of a prolonged pandemic and the disruption of the UK leaving the EU, and are currently fighting to consolidate their businesses and protect any cash reserves they have after a devastating year.
“Many firms fear the VAT Reverse Charge will have a devastating impact on their cash flow, with a requirement for additional cash flow to meet this of approximately 5 per cent of annual sales for those companies that submit quarterly VAT returns and 3 per cent for those that submit monthly returns.
“Introduction of the charge at this time will put jobs and businesses at risk and may result in companies that survived the covid-19 outbreak and the UK’s withdrawal from the EU being undone by this additional burden; and calls on the Government to reconsider its decision to press ahead with the change at this time.”
Fiona Hodgson, Chief Executive of SNIPEF, said: “Introduction of Reverse Charge VAT now would be seriously detrimental to the economic recovery of the sector.
“The changes will particularly impact SMEs that provide both services and materials. This is because they will have to pay VAT on the materials they purchase, which can be costly, but will not be paid the VAT by their customers.
“Instead, they will need to wait until their next VAT return to recover the VAT which will detrimentally affect their cash flow and that for a significant number of companies will be unsustainable.
“We at SNIPEF are endorsing the campaign’s call for everyone who opposes the rule change to write to their Member of Parliament highlighting the damaging impact Reverse VAT will have on your business, sector and the construction industry. SNIPEF has already written to all MPs requesting their support.
Reverse Charge VAT will change how cash flows through the supply chain as subcontractors will no longer charge VAT, which currently they can hold on to until it is time to pay it to HMRC. Instead, only the firm at the top of the supply chain will charge VAT to the end client, which will then be paid to HMRC.
The change is intended to clamp down on “missing-trader fraud”, which HMRC estimates costs about £100m per year in lost VAT. Such fraud involves a company collecting VAT from customers then disappearing without paying the sums collected on to the tax authorities.
SNIPEF and the other trade bodies argue that their member companies are already subject to independent scrutiny which limits fraudulent behaviour and the introduction of Reverse Charge VAT unfairly penalises those that pay their VAT and comply with their obligations.