A letter sent to Chancellor of the Exchequer Rishi Sunak MP last week has reiterated the sector’s concerns that reverse charge VAT will restrict cashflow in a vital and socially contributory industry, especially to the smallest firms, at just about the worst possible time.

Led by the Federation of Master Builders (FMB), the letter emphasises that the policy – due to come into force on March 1 – risks reversing what modest recovery the industry has made from the pandemic and will limit the scope for protecting and creating jobs at a time when the country needs this most.

It comes after the trade bodies pressed the case for a rethink with the Chancellor in a letter dated December 20 last year, for which they have yet to receive a reply.

John McGhee, SELECT’s director of finance and resources and association secretary, acknowledged an earlier delay in introducing the changes and also other UK Government aid to the sector, but said: “Introduction of Reverse Charge VAT now would be seriously detrimental to the economic recovery.”

VAT reverse charging means that businesses which are both VAT and Construction Industry Scheme registered will no longer pay VAT to most of their subcontractors.

Instead, VAT will only be paid to firms which supply only labour (employment businesses) and to the merchants and businesses that sell building materials only without any fix.

Mr McGhee said: “The proposals will substantially increase the burden on business and restrict cash flow in what is already an extremely difficult economic climate.

“The changes will particularly impact SMEs that provide both services and materials. This is because they will have to pay VAT on the materials they purchase, including extremely costly elements such as steel, cladding and concrete, but will not be paid the VAT by their customers. For a significant number of companies this will be unsustainable.”

SELECT and the other trade bodies argue that their member companies are already subject to independent scrutiny which limits fraudulent behaviour and the introduction of Reverse Charge VAT unfairly penalises those that pay their VAT and comply with their obligations.

The campaigning electrotechnical association has also alerted its 1,250 member companies to the gravity of the situation and its imminent implementation and has pledged to continue to fight for fair treatment for responsible firms.