The change to VAT collection arrangements that was due to come into force from October this year was last month postponed by HM Revenue and Customs until October 1, 2020.

However, Stuart MacPherson, business services manager at the Aberdeen-based chartered accountant, said firms should still be taking active steps now to ensure that their systems will be fit for purpose.

Alongside the implementation of the Making Tax Digital initiative and the prospective consequences of Brexit, it’s adding to the ‘to do’ list for sector companies.

However, by ensuring they fully understand its terms and the specific measures they need to apply to achieve compliance, Mr MacPherson said they can integrate it smoothly into their administrative processes.  

The new system means VAT will not be applied through the supply chain until the end user is charged. Instead, the supplier accounts for the input tax that they would have charged on both sides of their own VAT return. In other words, both output and input tax are adjusted so there’s no change in the overall cost if the business can reclaim all input tax.

Designed primarily to address the risk of VAT fraud in specific industry sectors, the new system will only apply to supplies of building and construction services supplied at the standard or reduced rates of VAT that are partly or wholly covered by the existing Construction Industry Scheme (CIS). It will, however, apply to the entire charge.

One of the prime issues that businesses will need to anticipate is the potential impact on cash flow.

Mr MacPherson said: “Smaller subcontractors often receive payment, including the input tax element, before the payment for the VAT quarter is made to HMRC. That cash flow advantage will no longer exist.

“HMRC has indicated that the delay has been implemented to give businesses more time to prepare, and we believe it’s critically important for businesses to understand the impact the changes will have in the respect of cash flow.”

Mr MacPherson added that it’s equally important for businesses to review their sales invoices, and for subcontractors and contractors to put a robust process in place for assessing whether work falls within the new domestic reverse charge regime.

Companies also need to ensure that any accounting or CIS software is compliant with the new arrangements, which apply only to UK businesses.

He said: “This will be another significant change for the construction industry and, as ever, it’s important that businesses to which it relates are fully aware of its implications. If in any doubt, the best advice is always to seek assistance from finance professionals.

“Affected businesses should use the additional time to ensure that they are fully ready for the changes when they are implemented on October 1, 2020.”