The delay to the reverse charge VAT regime may be a welcome relief, but the pressure will build once more next year

chloe mcculloch black

A demand to delay an economically damaging policy can split opinion, as spectators all over the world who have been gawping at the chaotic Brexit struggles know only too well. But if you’ve been able to tear yourself away from BBC Parliament you may have noticed the announcement of another delay, when on Friday last week the government caved into industry pressure and paused the introduction of its new reverse charge VAT regime. 

OK, it’s less sexy than Brexit – let’s face it, the intricacies of taxation regulations are hardly the stuff of dinner party conversations – but many feared the 1 October start date of this reform would drive plenty of firms in the construction supply chain into insolvency. Pressing the pause button has been universally welcomed.

Subcontractors say they could take a cash hit of as much as £800,000 … so securing a stay of execution was essential

Be in no doubt, this is a real victory for the construction industry, which had been lobbying hard for a six-month extension and ended up with a full year’s grace. For a sector often labelled fragmented and lacking coherent leadership, this appears to be an example where companies and trade bodies came together to deliver a powerful message asking the government to think again. But a positive outcome was far from certain – as late as Friday morning the signs were not looking good as officials at the business department told industry sources that they were not expecting the government to delay.

Then, HMRC issued a statement that very afternoon saying that to “help these businesses and give them more time to prepare”, a delay had been granted. Tellingly, it added: “This will also avoid the changes coinciding with Brexit.” And this is perhaps the clincher – the timing, coinciding as it might have with a no-deal Brexit, looked reckless. If the objective of the reform is to get the sector to clean up its act, pay on time and sort out its cash flow issues for the benefit of all, but especially the little guys, then a policy that could be directly linked to forcing those smaller firms into insolvency seemed perverse.

Let’s go back a bit – what’s so bad about a reform that the government says is designed to crack down on fraud? As you’d expect with VAT, it’s complicated but, in short, the changes – the most significant in 30 years according to one expert – mean that firms in the supply chain will no longer be able to charge VAT to main contractors, which many rely on to stay afloat. 

The reality is that suppliers are being squeezed on all sides – shrinking workloads, late payments, pitiful margins – and the 20% they bring in through VAT charges for construction services is a vital boost to cash flow. But under the new rules, responsibility of paying VAT will shift to main contractors, with the government admitting that around 150,000 businesses will be affected. Subcontractors Building has spoken to say they could take a cash hit of as much as £800,000.

So for all these reasons, securing a stay of execution was essential, but the lobbyists now see this as just a first step. If the VAT reform could have proved so catastrophic to so many vulnerable businesses in 2019, there is no evidence it will have less impact in 2020 – as Brexiters arguing with opponents to no deal would put it, this is just kicking the can down the road. So, having secured a key concession from government, industry bodies such as the British Constructional Steelwork Association are now upping their demands and calling for the policy to be abandoned altogether.

And you can see their point. Construction has some serious issues to tackle – not least the skills shortage, low productivity, low margins and a woeful lack of research and development spending. Given that steps to modernise – while moving in the right direction – have been at a snail’s pace, how likely is it the industry will have its house in order in just 12 months’ time? Then layer on top of all that the outlook for the wider economy and things really start to look shaky.

Sure, last week we had an encouraging spending round, with the chancellor proclaiming an “infrastructure revolution” and the prospect of a funding boost. But, as industry insiders have pointed out, without deep-seated issues being addressed there is a real question mark over construction’s ability to deliver such infrastructure ambitions. And quite frankly at this point, who can say the same chancellor or prime minister will be in place to push through this vision?   

How likely the government is to abandon its VAT reform is anyone’s guess. But by delaying, it can say the industry has had due warning. And taking everyone to the cliff edge, making main contractors think 1 October really was the start of the new tax regime, it forced them to take steps to protect their suppliers, with some prepared to ease cash flow by paying earlier. 

So, the government may think that if it’s possible to improve payment times when facing a crisis, surely with a year’s grace the industry can work out how to pay promptly all the time.

Chloë McCulloch, editor, Building