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Construction Sector Building up for a Cash-Flow Crisis

Ongoing reports suggest around 150,000 construction firms could be hit hard by the upcoming changes to the VAT reverse charge mechanism.

The changes mean many companies associated within the construction sector, including all supply chain levels, will no longer receive their 20% VAT payment when they submit bills. Instead, VAT cash will now be paid directly to HMRC by the customer, and the supplier will then be able to reclaim it in the normal way. Construction payroll firms are expected to be hit the hardest by the upcoming changes in October 2019 with up to a 20% drop in cash-flow.

HMRC are insisting the change is intended to combat “missing trader fraud”, a tax evasion technique where companies charge and collect VAT payments then disappear still owing to the tax authority.

To most companies in the sector, they will now have to apply the reverse charge mechanism if they supply any of the following services:

  • Constructing, altering, repairing, extending or demolishing buildings (or structures);
  • Constructing, altering, repairing, extending or demolishing of any works which are part of the land, these include; roadworks, power lines, electronic communications, runways, railways, docks and harbours;
  • Pipelines, reservoirs, water mains, sewers, industrial plants and coastal protection;
  • Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure;
  • Painting or decorating the interior or external surfaces of any building/ structure.

Services or activities outside of the scope for reverse charge include:

  • Drilling or extracting, oil or natural gas;
  • Tunnel boring, or construction of underground works;
  • Manufacturing building or engineering components or equipment for natural gas purposes;
  • The work of architects or surveyors, engineering, interior or exterior decoration and landscape consultants;
  • Production, installation or repairing sculptures, murals and other items that are ‘purely artistic’;
  • Installing security systems, including burglar alarms, closed circuit television and public address systems.
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