On March 1, 2021, the new VAT domestic reverse charge, otherwise known as the ‘reverse charge’ came into force for many construction sector companies, changing the way in which VAT is collected within the building and construction industry  and also potentially affecting the liquidity of some businesses who had used collected VAT as a cash-flow tool.
Now, rather than invoicing and collecting VAT, suppliers of building and construction services, who are VAT registered and whose businesses are reported under the Construction Industry Scheme, will have to allow the receiver of those services to be the one to pay the due VAT to HMRC. Whilst a supplier will still show the VAT due, by detailing this on their invoice, it will be the customer’s responsibility to pay the tax authority.
The new regulations are intended to crack down on the ‘missing trader’ phenomenon – one where a contractor has received payment, plus the VAT due on their invoice, but then disappeared before paying HMRC the VAT element.
The new rules affect all building and contracting suppliers who are not supplying zero-rated goods and services. This covering: constructors, demolition companies, builders, specialists in pipelines, sewers and mains, heating, lighting and ventilation installers, painters and decorators and many more businesses within the building and construction sectors.
Whilst this is a major change that may cause some confusion – something HMRC recognises and for which it is promising to apply “a light touch”, in the case of genuine mistakes and errors in accounting within the first six months of the legislation  – there are also other implications, as discussed by various experts.
It is believed that some sub-contractors could be required to pay more attention to their cash-flow management because of the change, as some will have relied on the VAT-to-pay element of their cash at the bank as working capital that could be utilised before the due payment was made.  These construction and building sector businesses are being urged to review their trading terms, to try to ensure that they receive their payments on time, and to keep a watchful eye on their cash-flow systems and levels of liquidity.
Cash flow is a major cause of business failure, which is why Trade Credit Insurance is a popular choice of insurance cover within the construction sector, where late payment is frequently an issue.  Trade Credit Insurance will help protect cash flow and liquidity, helping a business trade and grow with confidence. It will also step in should a bad debt be experienced.
Trade Credit Insurance proved a lifeline for many construction businesses caught up in the 2018 failure of construction giant, Carillion, demonstrating the value of this type of insurance. 
With the new VAT regulations providing current uncertainty for many construction and building businesses, it may pay to discuss the different types of Trade Credit Insurance available, with a broking expert. They will also be able to offer advice on insurance policies that can provide legal assistance, should HMRC bring any legal actions against the business.
If you need advice about this type of cover and how it can assist your construction business in this new era of the ‘reverse charge’, please get in touch.