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Challenges facing our industry in 2021 (continued)

Following our previous post, we wanted to highlight another piece of legislation which is due to come into force in Q1 2021.

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Domestic Reverse VAT Charge for Building and Construction services:

The “DRC” was due to come into legislation in October but has been postponed to 1 March 2021. The majority of building and construction services supplied under CIS are subject to the scheme, and it requires the customer to pay VAT directly to HMRC rather than to their supplier. 

There is a process for establishing if the scheme applies – in summary, the contractor beneath the “end user” or “client” in a contracting chain, should notify it’s sub-contractors that the DRC will apply to the services it receives. Invoices should therefore be issued “net”, and the VAT is accounted for, and paid to HMRC, by the Contractor. 

Recruitment Agencies, and other businesses who make a supply of staff (rather than services) for VAT purposes, are not included in this scheme. 

Sub-contractors who use their VAT cycle for cashflow purposes will be affected, so it is essential that companies are aware if the rules will apply to them, and are prepared for the changes, both in terms of cash flow and accounting. 

Financial Pressure

The Furlough scheme ends in October this year, and although it is being replaced with the “JSS” this does not offer the same benefits to employers. The VAT deferment schemes end in Q1, with staged payments now due before December 2021. It is clear that the DRC VAT scheme will also cause a number of contractors additional financial pressure.

Credit Underwriters are predicting a significant increase in business failures across all sectors, but our sector always features highly on the “insolvency league table”.

If a client’s business fails owing money, this will obviously cause you financial pressure. If a supplier’s business fails, this will cause pressure in the supply chain. How can we protect ourselves?

Many companies will rely on Credit insurance to pay if a customer defaults on a debt, and while this will prevent a total loss, there is also the premium and first loss to be accounted for. Insurance will also become more expensive and harder to secure if the market worsens.

Some supplier contracts require bonds to be provided, or personal guarantees to be offered – we have seen these on large capital projects, such as HS2, and we may see an increase in these across the sector.

The importance of robust credit control cannot be underestimated – the old adage “he who shouts loudest gets paid first” is often quoted, although we would also advocate building strong relationships between yours and your supplier / customers’ accounts teams.

Appropriate due diligence is arguably the best way to protect our businesses. It is essential to understand your supply chain, both above and below yourself. Who is my client working for? Is my sub-contractor using sub-contractors or agency labour? If so, who are they? Have the directors of my supplier or customer had failed businesses in the past? What payment terms is the end user operating? How do credit reference agencies rate my client or supplier? These are some of the questions we should be asking.

At The Shore Group, we use all of the above to protect ourselves, our clients and our suppliers. We are able to offer advice and guidance on the DRC VAT scheme, and are working with clients to ensure that we are able to offer a range of services which are compliant, but also innovative and cost effective.