Many firms in the construction sector face a one-off cashflow hit when a change in the VAT rules comes into effect on 1st October.  Under the rule change, a “reverse charge” will apply to many VAT-registered businesses in the construction sector.

This means that their fellow business customers will pay the VAT on their bills directly to HMRC – rather than to the businesses whose goods and services they have received. In effect, construction companies could suffer a one-off drop in their cash receipts when the new rules take effect.

When combined with a possible downturn in activity following a potential 31 October Brexit, construction firms could face a significant cash squeeze this autumn. With standard VAT charged at 20 per cent, the sums could be substantial.

Because they will no longer pay the VAT on some sales to HMRC, many affected firms could find that they become “repayment traders”. Their VAT return will be a net claim instead of a net payment to HMRC, with the tax authority owing the firms VAT they have paid on eligible purchases. 

Businesses that use invoice discounting facilities to assist their cashflow won’t escape the impact either, as they receive cash advances on the basis of invoice totals including VAT. After October, the VAT element will no longer be included and the amount advanced will reduce, causing cashflow pressure. 

VAT is used by many businesses as part of their working capital, so this will hit some construction businesses quite hard. That is why it is important that construction businesses plan ahead for this VAT rule change, starting by understanding how this will affect them.

Preparing a cash flow forecast will help them to assess the impact of the loss of VAT receipts. This should be taken into account, for example, when timing significant discretionary purchases due to be made in the autumn.

Any businesses that are likely to become repayment traders and that currently file quarterly VAT returns could consider applying to move to monthly returns in order to speed up payments due from HMRC.  They should also aim to file their returns as soon as possible – again with the aim of speeding up HMRC’s repayments.

Bai Cham, Partner, CVR Global