Ian Carpenter

Written by: Louise Cowell & Ian Carpenter

Ian Carpenter

Partner, Head of Indirect Tax

Construction Industry VAT: assessing the working capital impact of the domestic reverse charge

The introduction of the domestic reverse charge (DRC) on 1 March 2021 will pose further significant challenges for the construction sector. Not only will businesses need to get to grips with the new rules and make changes to their accounting systems, but the cash flow impact, particularly for sub-contractor businesses, could be considerable. 

Since the beginning of the pandemic, the government has announced various financial support packages for businesses impacted by Coronavirus, including the Coronavirus VAT deferral scheme and subsequent announcement that taxpayers can spread the repayment of the deferred VAT up to the end of March 2022 interest-free. The VAT-specific measures have been designed to give those taxpayers struggling with cash flow during these challenging periods some breathing space.  

Many in the construction sector are now asking why, when the Government and HMRC have stressed the importance of protecting businesses and jobs, is HMRC ploughing on with the introduction of the DRC, which will have a substantial negative financial impact for many businesses? 

It appears that many sub-contractors are unprepared for the cash flow impact that will arise as a result of these changes. Often businesses use the VAT they collect from their customers as working capital before it needs to be paid to HMRC, which can be up to three months after payment is received. The loss of that working capital in affected businesses, on top of the challenges posed by Coronavirus, will inevitably result in financial difficulties for many businesses, which may ultimately be forced to close. 

In addition to reviewing the systems, process and people changes required, construction businesses whose main source of income is from sub-contractors should model the anticipated cashflow impact of the changes now to avoid any surprises. Main contractors who engage sub-contractors should also consider the commercial impact this will have on any sub-contractors they rely on to minimise disruption to their business.

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