With only 10 days left of February, and the VAT reverse charge for construction due to come into force on Monday 1st March, it looks increasingly likely that the UK government is not going to postpone this significant tax change in the construction sector.

This is notwithstanding a very considerable snowballing recently of industry opposition to - at the very least - the timing of this significant change. Some may wish this change was "never", but "later" is clearly the preferred view of the sector to "now".

Build UK has been leading the construction industry-wide campaign to raise awareness of the impact of the construction sector reverse charge, but all the major trade bodies wrote to the Chancellor back in early December 2020. An early day motion was tabled in Parliament on 8th February expressing concern at the decision of the government to go ahead with the introduction of the reverse charge for construction services at this time.

The Treasury estimate that the new reverse charge will generate additional revenue of circa £100m through better compliance and the avoidance of fraud, which is clearly an important aim. However, the risks of making this change to the industry as a whole (which has an annual GDP output of over £115bn) do need to be balanced against that aim, and in particular the impact the change may have on small and medium sized businesses (SMEs).

Whilst it is true that the introduction of the reverse charge for the construction sector has already been postponed previously, the timing now is seen as particularly challenging to the construction sector still grappling with the impact of a prolonged pandemic and Brexit. The changes mean that the construction supplier will no longer charge VAT on its specified supplies. The subcontractor receiving the supplies will be responsible for accounting for and paying any VAT due to HMRC. The change will have a particular impact on SMEs. It is estimated that the requirements for additional cash flow to meet the charge will equate to approximately 5% of annual sales for those companies that submit quarterly VAT returns and 3% for those that submit monthly returns, and many commentators have highlighted the cash flow risks to businesses otherwise just about trading their way through these challenging times.

One less commented on aspect of the challenge for SMEs in the construction sector arising from the reverse charge is that this is not the only significant tax change about to impact the industry. At the start of the new tax year on the 6th April, construction will also be impacted by material changes to both the Construction Industry Scheme and the IR35 off payroll changes. All of these changes will give rise to compliance headaches for businesses and lead to increased administrative costs in the short term, particularly for SMEs.

As a firm we are well placed to assist clients struggling with these issues. Hugh Gunson, a Legal Director in our Tax Disputes practice, has written about the IR35 changes here, and Helen Coward, a partner in our Corporate Tax team, has written about the Construction Industry Scheme rules changes here. Helen's article reviewing the application of the reverse charge in construction can be found here.

The introduction of the VAT reverse charge in March will have a huge impact on the financial stability of companies across the construction supply chain that comply with all their legal obligations.

The risk to companies, jobs and projects in both the public and private sectors is significant which is why build UK and its members are calling for the Chancellor to withdraw the legislation.

Suzannah Nichol MBE, Chief Executive Build UK

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