The construction sector continues to be hard-hit with soaring demand, soaring costs, worker shortages, now has a new VAT issue to contend with on top of everything else. Earlier this year, the government introduced a VAT reverse charge which basically means that VAT is paid by the customer at the end of the construction supply chain, but not by the firms within the supply chain. Firms are required to still charge VAT, but rather than the VAT cash being passed through the whole supply chain it is paid just once, by the final customer.
This means that many construction firms are charging their 20% VAT in the normal way, but are not receiving that 20% cash. Often these same construction firms are paying VAT to their suppliers in the normal way too, however their missing incoming VAT cannot offset their outgoing VAT, which is causing a cashflow crisis for some businesses. These subcontractors are known as “repayment traders” who are owed money at the end of each quarter by HMRC.
Many such businesses are reporting that HMRC is not paying the cash back quickly enough, with one boss telling Construction Enquirer “We are currently owed more than £35,000 which is a considerable amount of cash flow for a firm like ours.”
Another firm said: “It is totally unacceptable. The whole scheme change was a hit to our cash flow and now this is making things even worse. We will be running VAT deficits each quarter which puts us under unnecessary pressure.”
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.