Construction Sector faces cash flow challenges with changes to VAT

Changes and Implementation

Changes in VAT accounting are being introduced by HMRC to combat widespread VAT fraud in the construction sector and come into effect in October 2019.  The introduction of a “reverse charge” is an attempt to curtail the payment of subcontractors who then fail to account for the VAT element to HMRC and quite often disappear.

There are a growing number of articles and guidance notes coming out from professional advisors that focus on the procedural aspect of accounting for VAT under the new rules and the transition arrangements whilst the new rules comes into effect :- 

But what about the cash flow impact?

In a sector where getting paid for services provided is already known to have its challenges, there may now be an immediate and potentially serious change in cash flow.  This will affect those subcontractors who supply a wide range of services which form the basis of a typical construction project, from demolition, construction and groundworks, through to the fit out trades.  From October, payments received for works done may no longer include the 20% VAT element.

In the meantime, subcontractors will still have to carry the costs of the VAT they incur on material purchases and overheads whilst waiting to get paid.  There is however some help as the new rules allow subcontractors who will become “repayment traders ”  (ie, their VAT returns become net claims rather than net payments for HMRC) to move to monthly returns to speed up payment applications to HMRC. 

There are also some complex implantation rules which need to be considered and applied requiring the status of each contract and each customer to be established before the correct VAT treatment is then applied.  As any business owner will know,  more red tape usually means more delays and more costs which can’t be passed on to customers!

Winter is coming…

This will of course bed in over several months, but concern has been expressed that the timing of the introduction of the new procedures may compound the effect on the construction sector. 

October is, after all, the time at which the Brexit saga might crystallise once and for all and we are already seeing the impact of economic prudence and investment and finance decisions being put off whilst the “what, how and when” of Brexit is established.

The construction industry will also be coming into the winter months when activity levels traditionally drop which in turn means income levels fall back. 

Funders and Finance

Many subcontract businesses rely on finance providers to help pay for material purchases and labour costs whilst waiting for applications for payments and invoices to be paid by customers.  Quite often a factoring style arrangement will provide finance against the VAT inclusive value of the invoice but under the new rules, those invoices will be lower in overall value so the advances against those invoices will also be lower. 

It may take a little time for the impact on the changes this will bring to finance arrangements to settle, but the move from gross invoicing one month to net invoicing the next month will compound the cash flow impact.

If you have clients in this sector who may struggle with the impact of these new rules, then we are here to help.  Please contact us on 0121 200 2962.