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Major changes coming to VAT for construction firms

Andrew Dixon, commercial director of specialist finance at Aldermore | 08:59 Wednesday 24th July 2019

Significant changes are coming to the way VAT works in the construction industry that will have both administrative and cash flow impacts.

It’s essential that businesses and the brokers they work with are aware of the implications and prepare for the impacts.

Under ‘reverse charging’, which comes into effect from 1st October 2019, VAT-registered businesses within a supply chain in the construction industry will no longer charge or receive VAT between themselves. While they will still record VAT, they won’t actually pay it over or receive it from each other. Only where services are to the ‘end user’ in a chain — likely to be the developer or main contractor — will VAT be charged and paid over to HMRC.

The changes are designed to combat possible fraud and make the collection of VAT more efficient. HMRC should still receive the same overall amount of VAT as before, while reducing the chances of a firm owing VAT to HMRC going insolvent, and thus incurring a loss to the public purse.

There are a number of issues for firms, and the brokers who help and advise them, to think about:

  • consider what changes are needed to billing and accounting systems
  • analyse supplier and customer lists to assess which ones reverse charging will apply to
  • identify which customers are ‘end users’ who will have to continue paying VAT to HMRC — it is advisable to gain confirmation in writing that they are an end user
  • talk to an accountant or tax adviser about the new requirements
  • assess the cash flow implications for the business, as they are likely to receive less VAT than before

The cash flow implications could be significant. Many building firms and subcontractors have become accustomed to receiving VAT, and indeed use it as a form of liquidity before they have to pay the monies owing to HMRC at the end of the quarter. This money will stop coming in from October. This will put pressure on some in the sector, smaller firms in particular.

Brokers may be well placed to raise awareness of the changes and help their clients assess the implications. Will any new financing be needed to help smooth them through the transition?

As a funder and champion of the construction industry, Aldermore can provide facilities to support firms with their cash flow needs.

In the meantime, it should be a priority for firms to familiarise themselves with the new regime.

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