Wise Up Wednesday! Construction Contractors Cash Flow VAT Hit
Construction Contractors Cash Flow to be Hit by VAT Changes
From 1 October 2019, HMRC is changing the way it collects VAT from construction organisations. This means that construction contractors cash flow, if not properly planned for, the new regime could push small and medium-sized subcontractors into an even greater cash flow crisis. It could also 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.
Why the change?
The driver behind these sweeping changes 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 this affect construction contractors cash flow?
This has several major implications for you and your cash flow:
- VAT will still need to be paid to your suppliers and subcontractors by you, but you will NOT collecting it from the Contractor.
- Your cash flow will be hit until the end of each VAT accounting period.
- No longer will you be able to rely on VAT money for cash flow.
- The onus will fall on major Contractors to pay very large sums of money to the exchequer.
- Entire industry will need to get to grips with a new accounting system, or risk being mired in complex red tape.
- Potential for confusion and manipulation is enormous.
So what can you 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.
Construction VAT Reverse Charge Seminar 17 July 2019
We have teamed up with the VAT experts at Chartered Accountants Duncan Toplis and Goodman Corporate Finance, to bring you a Construction VAT Reverse Charge Seminar in Nottingham on 17 July 2019.
The seminar will explain the new rules and provide guidance on how they will affect your cash flow and what you can do about it.
The exact venue and nominal cost will be decided once we have an indication of the level of interest.
This will affect your business, so please let us know if you would like to attend by emailing firstname.lastname@example.org. Places will be allocated on a first come first served basis so please let us know ASAP.
Please email here for more information.
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.
Also, 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 more about the existing VAT regulations relating to construction contractors here.