After several delays, HMRC’s VAT domestic reverse charge for construction services is due to come into force on 1 March 2021, making some significant changes to the way VAT works in the construction industry.
These changes are likely to have a major impact on cash flow; so it’s vital that businesses in the construction sector are aware of the implications – and are ready for them.
How is VAT changing in the construction industry?
A new ‘Reverse Charge’ process has been brought in for VAT. With it, VAT registered sub-contractors will no longer charge VAT on certain construction services to another VAT registered business.
Whilst they will still ‘self-account’ for any VAT due, they won’t actually pay it over or receive it from one another.
You can find more detailed guidance on the upcoming changes on the government website.
Why has HMRC brought in reverse VAT charging for construction sector businesses?
The Reverse Charge is being introduced to the construction industry specifically in an attempt to tackle ‘missing trader fraud’; which occurs in instances where companies receive VAT from their customers with no intention of paying it over to HMRC.
With VAT amounts no longer changing hands between contractors and sub-contractors, the hope is to streamline the system by reducing the number of parties which may need to be chased for non-payment – and make the collection of VAT more efficient and correctly accounted for on supplies by sub-contractors.
What are the cash flow implications of these changes?
The cashflow implications of these changes to the construction industry are significant. Subcontractors and building firms are generally accustomed to getting VAT on top of their service invoices and using it as a form of capital before paying HMRC at the end of the financial quarter.
For example, if a construction company bills £100,000 per month, they will collect £100,000+VAT (£20,000) per month. During the financial quarter, they will collect that 3 times, meaning in VAT they will have accrued £60,000 (which should be paid to HMRC minus any VAT they have paid out).
Under the new rules, they will no longer be collecting the +VAT amount so, using the above example, will not have £60,000 to rely on in between VAT bills.
Consider how much you collect in VAT each quarter – your cash flow is now going to be short of that amount.
The new rules started as of March 1st 2021.
What should construction companies be doing to prepare for the VAT changes?
- Conduct a thorough assessment of your your supplier and client lists to identify which ones the reverse charging will apply to.
- Ensure that the staff responsible for VAT accounting are up to date and fully to grips with the reverse charge and how it will work.
- Pinpoint which clients are ‘end users’ (paying VAT to HMRC) – and get it in writing from them.
- Carefully consider the cash flow implications for your business – and speak to a specialist finance broker if you need financial support to see you through an adjustment period
- Make sure you have a good accountant or tax advisor – because they will be familiar with the reverse charge and how it works.
- They will also be able to advise you on what changes need to be made to billing and accounting systems as a result VAT not being chargeable or receivable in the majority of cases
Read this – What to do if cash flow threatens to put a stop to your Construction Project
And this – How to get finance for a building or property development
Getting help with cashflow problems in the construction sector
These are tough times for the construction sector. As well as companies having to familiarise themselves with the new rules to prevent getting caught out; these delayed changes are likely to cause further stress – and most likely, cash flow problems. Ringrose Business Finance specialise in finance for the construction sector, and are always here to help you with your cash flow needs.
If you are struggling, then get in touch for an informal chat on how we can best help meet your particular requirements.