VAT Payments on Account regime – and how the Construction Reverse charge VAT has caught out some businesses

March 9, 2022

VAT Payments on Account regime – and how the Construction Reverse charge VAT has caught out some businesses


VAT Payments on Account regime – and how the Construction Reverse charge VAT has caught out some businesses

It has now been a year since the domestic VAT reverse charge was brought into effect for most supplies of building and construction services. Whilst most construction businesses have grappled with their accounting software and internal processes to succeed in managing the VAT accounting aspect, some of these businesses will have not been prepared for HMRC’s VAT Payments on Account regime.

HMRC’s VAT Payment on Accounts regime can apply to any VAT business and applies where a business’ total VAT liability exceeds £2.3m in a reference year. Once a business is caught by this regime, HMRC requires them to make interim instalments for the VAT liability, based on HMRC estimates. The fixed interim instalment can be an issue for certain businesses, particularly where their trade/cash flow fluctuates at certain times of the year.

There are also additional implications. A business that meets the criteria will have less time to submit the VAT return and make the payment to HMRC. The current rules for most businesses are that both the VAT return submission and the VAT payment can be made within one month and 7 days of the VAT period end. The VAT Payments on Account regime reduces the VAT filing date and payment period by 7 days, so these would need to be dealt with within one month of the period end.

A final implication is that if the business has a Direct Debit set up with HMRC, then this will need to be cancelled as Direct Debits cannot be used under this regime, resulting in some additional admin time required.

In the construction sector, there are certain businesses that benefited from a cash flow perspective by not having to pay the VAT over to their subcontractors on a weekly/monthly basis, and instead held onto the cash to pay over the HMRC when the VAT was due. However, what many will not have realised is that the retention of cash relating to subcontractors’ VAT increases what is deemed as the business’ VAT liability. If after a year the total VAT liability (including subcontractors VAT) exceeds £2.3m, then the business will be deemed caught by the regime and be required to pay instalments in advance of the normal due date, thus having a negative impact on cash flow.

Ordinarily, HMRC will write to the business after a reference year if the business falls within this regime. However, it is worth monitoring the VAT liability to ensure that a business can be prepared for any potential negative cash flow impact in advance.

There are options to consider where a business is caught by this regime. If the business is currently preparing quarterly VAT returns, they may look to change the period to monthly (although there is an additional administration impact of this to consider), so that they only pay over what is due each month. It might also be possible to appeal against a business falling within the Payments on Account regime, depending on the circumstances. There are also other potential options to explore, but each different on a case-by-case basis.

If your business is affected, or you are concerned that it might be, please do not hesitate to contact a Barnes Roffe partner and we will be pleased to assist

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PLEASE NOTE: By the very nature of this type of information the details of tax law might have changed since they were published, so contact your Barnes Roffe partner before acting on any matter contained in these documents.