It is a requirement for certain companies that operate in the construction industry to register on the Construction Industry Scheme. These companies have a responsibility to deduct funds from their subcontractors’ payments and then from here pass it on to HM Revenue & Customs. The reasons for these deductions are that they represent the subcontractors’ contributions towards both tax and national insurance. If you are a contractor is essential that you sign up to this scheme, and if you’re a subcontractor you don’t necessarily have to, but it is within your best interests to as otherwise, your contractor could be deducted from you at a higher rate (30%) instead of the standard (20%).
However, changes come into effect as of the 1st October 2019, if you’re a business that is supplying services under the Construction Industry Scheme and your customer is VAT registered, they will have the requirement to account your VAT. This change could especially affect you if you’re a smaller business as you’ll face a reduction in cash flow as you’ll be losing the ability to use your VAT payments as part of your working capital.
So, you might be thinking why have these changes been introduced and why now? Well, primarily it’s for the protection of the Government’s coffers. Many fraudsters have been charging VAT before going AWOL without paying these amounts over to the exchequer. Now instead of them being able to collect the VAT, it would be up to you as the contractor. The change is being introduced in October of this year (2019) so you need to put plans in place.
The first stage in the preparation is to review all the businesses that you currently supply or buy from to assess whether they are VAT registered. Only once you know the number of customers that won’t be paying VAT can you then start to assess the magnitude of the impact this change will have on your business’s cash flow. There will be ways to mitigate this financial impact that your business will inevitably suffer however it’s wise to know in advance so that you can take steps to lessen the impact.
If you want some independent and professional advice to help you prepare for this change feel free to speak to us, we are experienced within this sector and could help you more clearly understand how your business is going to be affected by this change and to answer any questions that you might have.
Also, if this is the first time that you have heard about this change and it applies to your business it is vital from this moment on that you prioritise getting a plan put together to work around these changes.