Cash flow in construction set to take a major blow

22/08/2019

The construction VAT reverse charge that comes into effect on 1 October could spell bad news for UK construction companies.

The changes, which were first announced in 2017, aim to tackle fraud within the sector. Under the previous model, suppliers would collect VAT from their customers and would then be liable to declare and pay it to HMRC.

However, an issue occurred with missing trader fraud, as certain suppliers would collect cash from their customers under the guise of VAT, but never pay this amount to HMRC. It is estimated that £100 million a year was lost because of this.

Under the new model, the business that has received supplies, rather than the supplier, will account to HMRC the tax paid.

Although this will solve the issue of missing trader fraud, it will have a knock-on effect on thousands of UK companies.

Not only will time and money have to be spent getting systems and staff ready for the change, but the cash flow of an estimated 150,000 companies will be affected.

It is estimated their cash flow could drop by as much as 20%.

Despite an almost two-year preparation period before the changes come into effect, a worryingly low percentage of companies have taken measures to prepare themselves, and HMRC has done little to produce user-friendly guidance.

A recent survey by the Federation of Master Builders shows that 69% of SMEs in the sector were not aware of the pending reverse charge, and of those that were, only one third were ready to implement the new system.

With companies so poorly prepared, the changes could cause huge amounts of disruption, be more expensive to implement and be detrimental to their cash flow.

Linda Skilbeck, Vice-Chair of the Chartered Institute of Taxation;s Indirect Taxes Sub-Committee, said: “As noted in the policy paper, businesses may be unprepared for the cash flow implications of the reverse charge, potentially leading to financial difficulties and even insolvency in the worst cases, as well as significant levels of business disruption even among larger companies.”

Are you worried about the implications of the VAT reverse charge? What have you done to protect your cash flow?