Prepare for VAT reversal charge

With six months until the VAT reverse charge comes into force in the construction sector, Henry Howard Finance is encouraging businesses in the industry to prepare themselves both financially and administratively.

In late 2018, the government introduced changes to the way construction companies will collect VAT: from October 2019, only client-facing construction companies at the top of the supply chain will charge VAT. Further down the supply chain, VAT will be calculated as a paper exercise and registered on the invoice as a ‘reverse charge’.

Companies registered with the Construction Industry Scheme (CIS) will fall into the reverse charge category of VAT collection. Those which aren’t CIS-registered must charge VAT.

There are fears, however, that many smaller construction companies could struggle financially because they have previously used the VAT collected to help cash-flow while waiting to be paid for building jobs.

Marie Dunkley, head of vendor hard asset at Henry Howard Finance, said that for many smaller companies the change could spell the end of the road, unless they prepare themselves early.

“Since the collapse of Carillion there has been a knock-on effect for many businesses in the construction world – payment terms have been stretched and so those at the end of the supply chain are the last to be paid, and normally they are the ones who can ill afford to wait for payment,” Marie said.

“Our fear is that the introduction of this VAT reversal charge and the longer payment terms for those at the end of the supply chain, is going to be the last nail in the coffin for many of these smaller businesses. We understand that the HMRC is doing all it can to combat fraud, but I do feel that by introducing this step it will hurt those who can ill afford extra administration, as well as extra time until they get paid.”

HMRC has made the changes to clamp down on ‘missing trader’ fraud which is when, within multi-jurisdictional trading, a product or service is offered by a shell company which adds on VAT as the product or service goes up the supply chain. This kind of fraud has been prevalent across other industries costing HMRC an estimated £13 billion, with the construction sector making up £100 million of that in lost VAT.

Marie suggests that getting ready early for the changes is therefore the best way for smaller businesses to mitigate any risks posed as a result. She suggests the following for businesses in the construction sector:

  1. Invest in accounting software – this is also an asset for your business so you can access asset finance if needed.
  2. Look at cash flow options, refinancing some assets may help. Asset refinance, where you sell your assets to a leasing company for its current value and then lease it back over a set amount of time for a regular rental repayment, could provide a much-needed cash flow boost.
  3. Look at staff training that may be needed to handle this different way of working. For many smaller companies, this change is a big one and the current way of working may not suffice.