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Changes in the way that VAT is collected in the construction industry should be welcomed – despite another delay

Changes in the way that VAT is collected in the construction industry have been delayed again by HM Revenue & Customs (HMRC) with a new implementation date of 1 March 2021.

This is great news for the industry. The changes in the VAT regime were announced over two years ago and some members of the VAT community have expressed frustration at this second delay, suggesting that construction companies have had plenty of time to prepare for this change.

However, what appears to be a technical change – making main contractors or developers responsible for retaining VAT charged by contractors on construction services which must be reported under the Construction Industry Scheme and them paying the VAT over to HMRC – will have a major impact on the working capital required by the providers of construction services.

We believe HMRC should be congratulated for supporting the industry at this challenging time. The construction industry, which is key to the UK economy, has been badly hit by the Coronavirus shutdown. The cash-flow impact on businesses has been huge and addressing the challenges of opening sites and funding the additional operational costs due to the new conditions under which they are now working are the current critical issues for the finance teams at construction companies, not implementing a new VAT regime.

For subcontractors the relief is even greater. The new VAT regime will tighten cash flow for these businesses as they will not be paid the VAT on their invoices (it is retained by the main contractors as ‘collection agents’ for HMRC), resulting in a 20% reduction in their cash receipts. They therefore need to build up working capital that has been severely depleted by dealing with the impact of the pandemic, before this change is implemented.

Construction companies are all focusing on their cash flow. HMRC have given them a six-month breathing space, but they still need to factor in to forecasts the additional working capital that will be needed in their businesses from 1 March 2021 when this VAT change is implemented.

If you wish to discuss how this change will affect your business, please contact Heather Powell or your usual Blick Rothenberg partner.

Or if you would like to see more of our insights and guidance for the industry, please visit our Property & Construction Hub.