As the political climate continues to cause uncertainty in the construction sector, imminent changes to the way the industry must handle VAT present yet another challenge for construction SMEs.

As of October 1st this year, the VAT ‘reverse charge’ will mean building and construction companies no longer receive 20% VAT when submitting their invoices. Instead, the responsibility shifts and the customer receiving the service will pay VAT directly to HMRC, and then report it through the Construction Industry Scheme.

This change to the way VAT is accounted for is an attempt by HMRC to crack down on VAT ‘missing trader fraud’ which equates to an estimated £100m in lost tax revenue each year. HMRC believe the practice is on the rise, where the trader charges a large amount of VAT before then disappearing, along with the output tax. The VAT then never makes its way to HMRC.

Although targeting fraud should be a priority for HMRC, little thought seems to have gone into the wider impact that this will have on business, particularly SMEs. Business owners are often already short of time, without having to address changes to their accounting practices. It is expected that 150,000 businesses are set to be hit by ‘reverse charge’ implications, with the reality being a potential 20% drop in cash flow – which is crucial in keeping SMEs in a strong place to grasp opportunities and grow their businesses.

With the construction industry totalling 13% of UK GDP and creating 2.4 million UK jobs, any move that could destabilise construction businesses could have broad consequences on the economy.

As many predict the ‘reverse charge’ to spark ‘chaos’ across the industry, The Federation of Master Builders (FMB) have requested a six-month delay to the transition. Research by FMB shows that more than two-thirds of construction SMEs have not even heard of the upcoming change to the VAT system.

With the current skills shortage in the industry, unpredictable price of materials, and consumer confidence falling, going ahead with the VAT ‘reverse charge’ while businesses are unprepared, has the potential to knock the construction industry for six.

As October looms, now is the time for construction SMEs to start preparing for the impact that the VAT ‘reverse charge’ could have on their business. Not only will they need to ensure that their VAT accounting systems are compliant and that their staff are trained and comfortable with the new rules, they will also need to look ahead and prepare for the potential impact on their cash flow and liquidity. 

The changes are set to add to an already challenging landscape so it’s particularly important that construction businesses, and those in their supply chains, are aware that there are ways to alleviate the pressures of reduced cash flow. As a funding partner to construction SMEs up and down the country, our construction team are seeing symptoms of the sectors’ instability play out. The VAT reverse charge is another challenge for construction SMEs to overcome.   

• Euan Bell is a construction finance specialist at Ultimate Finance