These new rules have been designed to combat VAT fraud in the construction sector, as HMRC has stated that labour supply chains represented a significant risk to the exchequer. As a result, it is looking to introduce the reverse charge for construction services.
This means that all VAT paid between construction firms will be reverse charged, so the VAT will not be paid to the subcontractor, but directly to HMRC.
Consequently, the customer will need to account to HMRC for the VAT for their purchases rather than the supplier. This reverse charge will need to be applied throughout the supply chain, as payments will have to be reported through the Construction Industry Scheme. The main contractor would account for VAT on the supplier’s invoice and simultaneously deduct that VAT, which would leave a nil net tax position.
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This will inevitably lead to restricted cash flow within construction businesses as it will no longer be possible to rely on the VAT money to aid cash flow. Services within the construction industry will find that the breathing space will no longer exist between the time VAT money from the customer is received and the time it has to pay HMRC.
While this is bad news for the construction industry, it may, however, open up a space for the development finance sector to do business with construction firms and help tackle problems of restricted cash flow. We may see the construction industry utilising new forms of tailored financing for their projects as new products become available.
Thus, this news need not necessarily spell trouble for the construction industry. If anything, it may lead to greater ingenuity and a greater range of possibilities within the sector if businesses are willing to make use of the different financing options available to them.
Nothing is set in stone yet. Nonetheless, the opportunities that could arise out of these changes can be viewed as an opportunity for both sectors. We could see the development finance sector capitalising on new partnerships and relationships with other industries as it searches for innovative solutions to help support UK businesses.