- 12 Sep
How Construction Companies Can Prepare For The Delayed Reverse Charge VAT Change
Many construction sector companies have breathed a sigh of relief as a one year delay was announced to the Reverse Charge VAT implementation (TheConstructionIndex 09/09/19), however that additional time to prepare will soon be eaten up if construction companies don't take steps now to prepare for the new deadline of 1st October 2020.
Reverse Charge VAT
The plan was to implement this change on 1st October 2019, however lobbying from the construction industry has resulted in the Government agreeing to delay the change until 1st October 2020.
In essence the change means that for construction services, rather than collecting and holding back the VAT element of your sales invoices, which you then pass on to HMRC, your customers will pay the VAT element direct to HMRC. This is designed to reduce non payment of VAT in the sector.
Whilst the change has been delayed, HMRC remain committed to its implementation. Therefore, companies in the construction sector have a narrowing window in which to prepare.
How To Prepare For Reverse Charge VAT
The accounting changes are something that you may need to consult your accountant about. It will probably require amendments to your accounting system in order to accommodate the change. You should consult with your accountant.
Cash Flow Impact Of Reverse Charge VAT
One of the biggest impacts is to the cash flow of a company that doesn't separate their VAT receipts from their net income. In these cases the company may be using the money that should be preserved to pay their VAT bill, as a cash flow buffer for their other expenses.
When a company is holding say 3 months worth of VAT receipts (assuming quarterly VAT payments rather than monthly), this could be equivalent to 20% of their net sales for the quarter, a significant amount of money. With net sales of say £100K per month, that could be £60K of VAT that is collected, held, and they paid away to HMRC when it falls due.
Typically, a company will have one month and 7 calendar days (from the end of the VAT quarter) before they have to pay over the quarter's VAT receipts (less any input VAT that is offset), to HMRC. This means that a further month (or more) of sales receipts (including VAT) are likely to have been received by the time the VAT bill falls due. In effect many companies may be using this additional buffer to supplement their cash flow.
In the example above, the additional month's sales, plus VAT, could be £120K - that is then being used to help pay the prior VAT bill, or to pay other expenses. This will not be possible once the reverse charge VAT method has been implemented. The supplier will not be collecting and holding the VAT element. In the example above, the £60K for the quarter's VAT will not be building up in their account, so it can't be called upon to smooth out cash flow spikes. Similarly, the additional month's sales VAT will not be received, so that's another £20K less that could no longer be held. After the Reverse Charge VAT Change, the supplier could find themselves £80K short in terms of the funding cushion that they would have held, under the previous regime.
Alternative Cash Flow Buffer
This could create the need for an alternative cash flow buffer, which could be provided by receivables finance. This is a funding service provided to the construction sector. It allows suppliers to receive a prepayment against either sales invoices, or applications for payment. Typically this is 70% of their value, with the balance (less fees) paid to the supplier once the customer pays.
This accelerates your cash flow, boosting the working capital that you have available. To see if you qualify for this type of funding please speak to Sean on 03330 113622.