Concerns over construction cashflow

UK Construction companies could be facing cashflow problems in the near future thanks to the dramatic increase in building material costs, and the introduction of the VAT Reverse Charge Scheme on 1 March 2021.

Statistics released by the Department for Business, Energy and Industrial Strategy last week show that the cost of construction building materials, which have been increasing steadily for the last few years, shot up again in the 12 months to May 2021.

The increase of what is referred to as "All Work", which include both new construction and repair & maintenance increased by 10.2%. This could signify a major issue for some companies in the construction industry, particularly those who work on fixed price contracts. On top of the impacts of Brexit and Covid, and the well documented shortage of materials, this unanticipated cost increase could mean significant margin erosion for construction companies.

Meanwhile the VAT Reverse Charge Scheme could cause cashflow problems for subcontractors in the construction industry. Under the scheme it is the contractor who is responsible for paying the VAT on the subcontractor's services directly to the Revenue. Subcontractors will therefore no longer receive VAT on top of invoices from their customers.

Prior to the introduction of the Reverse Charge Scheme, this money would still have needed to be paid to HMRC, but in the short term it could have provided a much needed cushion of cash at bank between contract payments. This, coupled with the rising material costs, means that construction subcontractors may try to increase their charges in an attempt to maintain a steady cashflow and income.

With the demand for housing still growing there would appear to be a reasonable future for the sector, provided that short term cashflow issues are not ignored. We would urge any business to seek advice at the earliest sign of cashflow, or indeed any other issues, as prompt action will provide the best chance for a successful outcome.