VAT Reverse Charge adds to challenges for construction firms

As if navigating the way out of a global pandemic wasn’t enough, this year the construction industry has had a new VAT issue to contend with. The VAT domestic reverse charge was introduced back on 1st March after several delays. Its impact on cash flow is now being felt by construction firms already dealing with soaring demand and costs and skills shortages. 

What is the VAT domestic reverse charge?

The VAT domestic reverse charge basically changed the way VAT is collected in the construction sector. It means that VAT is paid by the customer at the end of the supply chain, rather than those who sit within the supply chain. Firms still charge VAT on the invoice but the VAT is paid just once by the final customer in the chain.

Impact on cash flow

With the reverse charge in place, many construction firms are charging their usual 20% VAT, but aren’t getting that back until the end of each quarter. There have also been reports that HMRC are being slow to repay VAT owed, with one construction firm boss telling Construction Enquirer that they are currently owed more than £35,000.

Many such companies would previously have used VAT received from customers to fund working capital for staffing and materials etc. So it is easy to see why the reverse charge is causing cash flow issues, especially for businesses operating on tight margins.  

It is worth noting that while employment businesses supplying construction services are exempt from the reverse charge, the resultant cash flow effects are likely to be felt across supply chains.   

Julia Kermode, Founder of IWORK, which champions independent workers, questioned the timing of the implementation of the VAT reverse charge, given the potential cash flow impact. She said:

“The construction sector is already struggling due to soaring demand skills shortages and supply problems, a new government-created VAT cashflow problem could be the final nail in the coffin for some firms. At a time when we should have been nurturing the economy it was unthinkable for HMRC to implement the VAT reverse charge in March this year, particularly as the likely cashflow consequence was well-documented. Now HMRC simply must speed up their repayments or we risk losing many of the businesses that are critical to the UK’s post-pandemic recovery.”