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Wise Up Wednesday – Changes To VAT In Construction

Are you aware of the changes to VAT in construction?  Your cash flow is about to be hit by changes to the way VAT is collected in construction.

From 1 October 2019, HMRC is changing the way it collects VAT from construction organisations. If not properly planned for, the new regime could push small and medium-sized subcontractors into an even greater cash flow crisis and force some Contractors into bureaucratic limbo.

And undoubtedly in the ruthless world of construction there will be those who seek to exploit the situation to delay your payment or pay you less than they should. The government estimates that between 100,000 and 150,000 companies will be affected.

Changes To VAT In Construction. Why The Change?

changes to vat in construction payment under the construction act

 

 

 

 

 

 

 

 

 

The driver behind these sweeping changes to VAT in construction is the government’s mission to clamp down on a particular type of crime known as ‘missing trader fraud’. The scam has migrated across several industries and is now taking root in construction supply chains. Missing trader fraud exploits weaknesses in the labyrinthine VAT system to steal government money.

Under normal circumstances, a subcontractor will charge the main contractor for work carried out, adding 20% VAT.

Every quarter, the subcontractor declares the VAT, paying it back to HMRC. So far, so straightforward. But as the product or service moves up the supply chain, bits of VAT are added at each new transaction, and subcontractors claw back VAT that they have paid their suppliers.

Seasoned criminals have found lucrative ways of tapping into this cash by taking over organisations or setting up fraudulent shell companies which provide services, such as the supply of labour, and charge VAT, but then disappear without paying it to HMRC.

Almost The Whole Industry Is Affected

Virtually the whole of construction will have to bear the brunt of the new system and as always our concern is for you the Specialist Contractors, Trade Contractors and Subcontractors.

The new reverse charge VAT system will be imposed from 1 October 2019. Under this new procedure, VAT cash will no longer flow between businesses. With each business transaction, the VAT will be calculated as a paper exercise and registered on the invoice as a ‘reverse charge’.

Only client-facing organisations at the top of the construction supply chain (Main Contractors on all major projects) will be required to pay the tax.

As a general rule of thumb, any company that is registered with the Construction Industry Scheme (CIS) will fall into the reverse charge category. Any company that is invoicing a client that is not CIS-registered must charge VAT.

How Will The Changes To VAT In Construction Affect You?

This has several major implications for you and your cash flow:

• you will still be paying VAT to your suppliers and subcontractorsbut NOT collecting it from the Contractor
• your cash flow will be hit until the end of each VAT accounting period
• you will no longer be able to rely on VAT money for cashflow
• the onus will fall on major Contractors to pay very large sums of money to the exchequer
• the whole of industry will need to get to grips with a new accounting system, or risk being mired in complex red tape
• the potential for confusion and manipulation is enormous.

So What Can We Do About It?

We can’t stop it from happening that’s for sure! There has already been an “industry consultation” but it’s not something we were aware of until a few weeks ago, so it seems that was a pretty low key affair and not well publicised.

No-one I have spoken to was aware of the consultation, and the new system has come as a surprise to almost every Specialist contractor I have spoken to about it.

So, the best thing every Specialist Contractor, Trade Contractor and Subcontractor can do is to ensure that they are fully conversant with the new regime, and to plan for any cash-flow shortfall that it is undoubtedly going to create.

We have teamed up with the VAT experts at Chartered Accountants Duncan Toplis and Goodman Corporate Finance, and delivered a number of Construction VAT Reverse Charge Seminars throughout July.

The seminar explained the new rules and provided guidance for Subbies on how they will affect your cash flow and what to do about it.

If you want to find out out about further seminars and how the changes will affect your business, please email info@streetwisesubbie.com.

And remember that if you need any help to resolve any kind of payment problem, please don’t hesitate to pick up the phone, take action and give us a call on 01773 712116.

And finally, as well as providing Subbies with information about the changes to VAT in construction, you will be pleased to know that we are helping Specialist Contractors just like you to resolve problems every day of the week.

We have the specialist resources to support your business and ensure you protect your financial interests. If you would like a free no obligation chat, please call us on 01773 712116.

You can read the Government Guidance here – but I’m sure you’ll learn more by contacting me by email here.


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