Changes to VAT to leave sub-contractors short of cash

Construction Cashflow

Sweeping changes are being made to VAT provisions that will significantly impact the construction industry from the 1st October 2019. A “reverse charge” is being introduced that will change who is responsible for VAT provisions in relation to the supply of construction services, in particularly those between sub-contractors and main contractors.

Currently it is the responsibility of the sub-contractor to account and charge VAT on supplies to main contractors. This is set to change in October when main contractors will now be responsible for declaring the VAT on services supplied by the subcontractor. Under the rules of the reverse charge main contractors will now deduct VAT from payments due to subcontractors, sending the VAT directly to HMRC.

These changes have been introduced by HMRC in order to better control VAT fraud in the construction industry. The risk of fraud may have been mitigated by HMRC, but the changes place a new stress on the cashflow of sub-contractors.

By way of example, under the new ruling what would have been a £120,000 payment from a main contractor (including VAT) with the reverse charge applied the sub-contractor would now receive £100,000. While a sub-contractor’s materials and other costs for the same job are still subject to VAT and would still be payable by the subcontractor. Meaning VAT payments can’t be offset in the company cashflow. In this scenario a business would be left with a £20,000 shortfall in their cash position.  

A change in the amount of cash readily available will have a huge impact on cashflow. All businesses in the construction industry should be careful to review their operations in order to identify the potential risks to cashflow and working capital. Following the changes businesses will need more working capital and will need to find extra cash from external funders or by releasing funds tied up in their debtor book. A robust credit control and debt recovery function will be paramount to make up for the shortfall. This is where CRS can help.

CRS are construction debt recovery and credit control specialists with years of experience in the quick recovery of outstanding construction debt. We offer a free review of internal processes outlining how we can improve cashflow through our bespoke credit control and debt recovery packages, working along side your accounts department or operating a fully outsourced service.

Contact us today for free no obligation advice T: 0114 236 1884 E: c.myers@contractrecovery.com

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