BUSINESS
MAJOR VAT
CHANGES TO LEAVE SUBCONTRACTORS WITH CASHFLOW PROBLEMS
I
n recent months, HMRC have published draft legislation which means that from 1st October 2019, Subcontractors in the Construction Industry will no longer be required (or able) to charge VAT on construction services to their contractor clients. The introduction of what is known as ‘VAT domestic reverse charge’ from 1st October 2019, means Subcontractors will only be required to notify their Contractor clients to self-account for the VAT that would otherwise be due for payment on the Subcontractors invoice. The reason for this change is to reduce fraud often referred to as ‘missing
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NETWORKS
trader’ and ‘carousel’ VAT fraud. These types of fraud have been steadily growing over the years and result in hundreds of millions of lost revenues to the Exchequer. The cashflow consequences that arise from this new VAT change, however, are likely to have a serious impact upon the businesses of many subcontractors who rely on retaining the ‘temporary use’ of the VAT collected on sales invoices as working capital for their businesses. VAT collected on their sales invoices is only required in many cases to be paid over to HMRC one month + 7 days after the end of each VAT accounting quarter.
Let us look at such an example of a Subcontractor whose supplies are all at standard VAT rate: • All invoices (supplies) are to a Principal Contractor • Average Total Invoices per VAT quarter = £1m Net of VAT (Gross Invoice value £1.2m or £400k pm) • Monthly payments received from Contractor = (Gross Payments of £400k with a VAT Element £66.6k included) In the example below, the Subcontractor will no longer be receiving payment of VAT of £66,667 per month on his invoices. The VAT temporarily retained peaks at £200k in the third month of his VAT quarter. Any funding gap created by this must now be filled elsewhere. Of course, the subcontractor will have some cashflow benefits if some of the work is further subcontracted to a VAT registered Subcontractor, so the true impact will very much depend on the circumstances. Clearly for labour supply type construction businesses with very little input VAT, the cashflow loss is likely to be significant.
