HMRC plans to introduce VAT reverse charging to the majority of construction-related services from 1 October this year. Companies who are VAT registered and Construction Industry Scheme registered will no longer pay VAT to the majority of their subcontractors.
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VAT will only be paid to companies that supply labour only and to the merchants and businesses that sell building materials only, without any fixing.
But groups including the Building Engineering Services Association (BESA), the Federation of Master Builders (FMB), the British Constructional Steelwork Association (BCSA), the Civil Engineering Contractors Association (CECA), Federation of Small Businesses (FSB), the FIS, the Electrical Contractors Association (ECA) and the National Federation of Builders (NFB) have all written to chancellor Sajid Javid calling on him to delay the proposal.
Increasing negative cash flows
The BCSA said it had calculated that for an average subcontractor turning over £15m, reverse VAT will mean increasing negative cash flows, peaking at £262,500 in month three of the change.
“This could be the end for many subcontractors who are already experiencing late payment, difficulties in agreeing final payment amounts and other additional costs such as the apprenticeship levy and increased pension contributions”, said Sarah McCann-Bartlett, director general of the BCSA.
Alasdair Reisner, chief executive of the Civil Engineering Contractors Association, said: “Civil engineering contractors are extremely worried about the impact of the forthcoming new rules on their immediate cashflow and the impact that this will have on business sustainability. The construction sector is already struggling due to ongoing political uncertainty, with declining workloads for many members.
“The introduction of the reverse charge VAT may push small contractors into the red, as they do not have the resources to manage the immediate impact of the legislation change. We are therefore calling on government to delay the implementation of reverse charge VAT and work with industry to help businesses prepare for the new rules in the best possible way.”
Iain McIlwee, CEO of FIS, added: “This isn’t about industry not being prepared, but not being able to prepare. Whilst we’ve known about it for a long time, the information has only started to emerge from HMRC in terms of the process. We’ve been telling members about it, running workshops and webinars, but I’ve yet to meet someone who has had the letter from HMRC and so there are swathes of the market that still don’t know it is happening. Many of the accountancy software companies haven’t updated the software.
Damaging for cashflow
“The biggest issue, however, it is not the admin, it’s the impact on cashflow. Credit in construction is already tight and with few lifelines from traditional financiers, further drains on cash will be fatal for some companies – this is almost impossible to prepare for. I don’t think anyone could have seen the uncertainty into which this would be launched and consequently a pause would be prudent.”
Brian Berry, chief executive of the Federation of Master Builders, said: “The fact that 15 of the leading construction trade bodies have come together to speak to the government with one voice on this issue shows the extent to which we are concerned. We urge the government to rethink the timing of these changes and announce a delay of at least six months. With a potential no-deal Brexit also due to take place in October, the timing could not be worse.”
Craig Beaumont, policy and advocacy director at the Federation of Small Businesses, said: “The reverse charge threatens to massively damage cashflow among small construction firms, many of which already struggle to stay afloat in an industry dogged by late payments. What’s more, preparation time has been minimal – guidance on the change has only appeared recently, yet roll-out is just two months away. With uncertainty already hurting small business confidence, the government should do the sensible thing and postpone introduction of the reverse charge.”
