VAT changes to add to cash worries in construction

Construction firms are likely to face a significant squeeze to their finances when new rules on how VAT is collected by the building and construction industry come into effect 1st March 2021.

The changes – the Domestic Reverse Charge (DRC) – will require customers to pay VAT directly to HMRC, rather than to suppliers, meaning construction firms could potentially see a sharp drop in income when the new rules come into force.

The guidance published by HMRC stipulates that the rule change will only apply to firms that are registered in the UK, who provide “specified services that are reported under the Construction Industry Scheme”, and the DRC will not apply to customers who are not registered for VAT in the UK.

With the standard rate for VAT at 20%, and with many construction firms counting on VAT as part of their working capital, the rule changes will hit some businesses quite hard.

Understandably, in current circumstances, industry commentators are calling for a further delay to implementation, which has already been postponed twice over the past 18 months. In December, the Federation of Master Builders (FMB) wrote to the Chancellor to argue that this policy be withdrawn in light of the ongoing impact that the coronavirus pandemic and Brexit are having on building companies. Read more about the call to delay by the the chair of the FMB and others.

Isobel Brett, Director of Bretts Business Recovery, commented “This rule change could have serious ramifications for some.  Those already suffering cash flow issues could find themselves out of business.  If it goes ahead as planned, action needs to be taken now to ensure adequate working capital is in place.”

Contacting Bretts Business Recovery (BBR), your accountant or other professional advisers will help you plan ahead be better prepared for the DRC. If you would like assistance or advice in planning for the DRC, and the financial implications it will have for your business, please contact us.