VAT cashflow Ellis Fox Blog

VAT and Cash flow – a new headache for Construction

The reverse VAT changes that have recently come into effect are predicted to negatively impact subcontractor cash flows for the next two to three months. In fact there was an industry campaign launched in February 2021 to try stop its implementation. The primary argument for this is that companies are already being hit hard by Brexit changes such as supply shortages and prices increases. Plus many companies are still feeling the impacts of the pandemic. The general feeling is that now is not the time to implement a change that will only add to the cash flow pressures in the short term.

While all of this may be true, another side of the argument may be that there will never be a good time to implement policies that will affect cash flow. As it is the industry is not known for its high profit margins or on-time payments. Deferring the implementation of the new reverse VAT may give subcontractors a bit of a breather now, but it won’t be any easier when it eventually is implemented.

While it is true that smaller firms are more likely to feel the pinch, it must be remembered that the VAT change has been on the cards for years and has already been deferred twice. In October 2019 and again in March 2020. Treasury argues that this new form of VAT collection for the construction industry will be more effective as VAT will only be collected once from the client when invoiced by the main contractor. It is estimated that the increase in tax revenues received should be around £100 million. Previously all subcontractors added VAT to their invoices and benefitted from the added cash flow until it was payable. This will no longer be the case unless they are working directly for the end client.

Another concern raised is how the change will be administered. There is a strong likelihood of errors occurring and this could cause even further delays in payments as companies wrangle over correct invoicing procedures. It’s certainly going to be a few challenging months ahead for accounts departments. Some construction firms have made provision for this shortfall in cash flow, by streamlining expenses and ensuring they have cash reserves. Others have secured government loans to ensure that they can continue operating effectively while navigating the new changes. Whether this will result in better VAT revenues is yet to be seen, and hopefully somewhere in the process construction firms can take this opportunity to transform into a more resilient business.