On 1 March 2021, significant changes to the way VAT works in the construction industry are coming into effect. They’re likely to have both an administrative and cash flow impact so it’s essential that businesses are aware of the implications and get ready for the new changes.
What is changing?
The new scheme is known as ‘reverse charging’; this means that VAT-registered businesses within a supply chain in the construction industry will no longer charge or receive VAT between themselves. While they will still record VAT, they won’t actually pay it over or receive it from each other. Only where services are to the ‘end user’ in a chain – likely to be the developer or main contractor – will VAT be charged and paid over to HMRC.
Why is HMRC making these changes?
These changes are aimed at tackling fraud and to make the collection of VAT more efficient. As VAT amounts will no longer actually change hands between contractors and sub-contractors, HMRC hope to streamline the system by reducing the number of parties which may need to be chased for non-payment. HMRC aim to receive the same overall amount of VAT as before whilst reducing the chance of a firm owing VAT going insolvent and incurring a loss to the public purse.
More detailed guidance on the changes are available from HMRC on the govt website.
The cash flow implications of these changes could be significant
Many building firms and sub-contractors have become accustomed to receiving VAT on top of their invoices for services rendered, and indeed use it as a form of liquidity before they have to pay the monies owing to HMRC at the end of the quarter. This money will stop coming in from 1 March 2021.
As James Duffill of real estate consultancy Naismiths says: “Many firms in the sector seem unaware of the changes that are coming. It is essential to undertake a detailed review of the impact of this change on cash flow and consider how the business will deal with it.”
What should firms be doing to prepare?
There are several measures that all firms who belong to the Government Construction Industry Scheme should look to take, including:
- Consider what changes are needed to billing and accounting systems, seeing as VAT will no longer be chargeable or receivable in most cases
- Analyse your supplier and customer lists to assess which ones’ reverse charging will apply to
- Identify which customers are ‘end users’ who will have to continue paying VAT to HMRC – it is advisable to gain confirmation from them in writing that they are an end user
- Talk to your accountant or tax advisor about the new requirements
- Assess the cash flow implications for your business as you are likely to receive less VAT than before
Aldermore is here to help
At a time when the construction industry is already wrestling with tougher trading conditions due to the impact Covid-19 and the potential effects of Brexit, these delayed changes (originally due to be implemented in 2019) could put even further pressure on the sector. Many small contractors and sub-contractors in particular, could struggle with short-term cash flow issues in the early months of the new system. Companies must familiarise themselves with the new regime as a matter of priority to avoid getting caught out. As a funder and champion of the construction industry, Aldermore can provide finance facilities to support firms with their cash flow needs.
You can contact the Aldermore construction finance team on 03339997577 or visit our website aldermore.co.uk/constructionfinance. Visit the gov.uk website for more information on VAT reversal.
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