Andrew Dixon, commercial director of specialist finance at Aldermore looks at how construction firms can prepare themselves for impending changes to VAT
In just a couple of months’ time, significant changes to VAT in the construction industry are coming into effect. These changes are likely to have both administrative and cash flow impacts, so it is essential that businesses are aware of the implications and get ready for the new changes.
The new scheme, taking effect from 1 October 2019, 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 the change?
These changes are aimed to combat possible fraud and to make the collection of VAT more efficient. Because VAT amounts will no longer actually change hands between contractors and subcontractors, HMRC hopes to make the system more efficient as there will be fewer parties that HMRC may need to chase for non-payment. HMRC should still receive the same overall amount of VAT as before, while reducing the chance of a firm owing VAT to HMRC and going insolvent, incurring a loss to the public purse.
Detailed guidance from HMRC is available here.
What should firms be doing?
So what will this mean in practice for contractors and subcontractors in the industry? There are a number of issues that all firms who belong to the Construction Industry Scheme should look at:
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.
Analysing the cash flow impact
The cash flow implications could in fact be significant. Many building firms and subcontractors 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 October.
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.”
At a time when the construction industry is already wrestling with tough trading conditions, these changes could put further pressure on the sector. Many small contractors and subcontractors in particular could struggle with short-term cash flow issues in the early months of the new system.
As a funder and champion of the construction industry, Aldermore can provide facilities to support firms with their cash flow needs.
In the meantime, companies should familiarise themselves with the new regime as a matter of priority.
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