Jim Burberry: Assessing the working capital impact of the Domestic Reverse Charge

Jim Burberry, partner at RSM, comments on the Domestic Reverse Charge which was introduced yesterday.

Jim Burberry: Assessing the working capital impact of the Domestic Reverse Charge

Jim Burberry

After being pushed back twice, the VAT Domestic Reverse Charge for the Construction Industry (the ‘DRC’) was introduced yesterday (1 March 2021). The introduction of the DRC will pose significant new challenges for the sector - not only will businesses need to get to grips with the new rules and make changes to their accounting systems, but the cash flow impact, particularly for sub-contractor businesses could be considerable.

Since the beginning of the pandemic, the government has announced various financial support packages for businesses impacted by Coronavirus - including the Coronavirus VAT deferral scheme and subsequent announcement that taxpayers can spread the repayment of the deferred VAT over a longer period up to the end of March 2022, interest free. The VAT-specific measures have been designed to give those taxpayers struggling with cash flow during these challenging periods some breathing space.

Many in the construction sector are now asking, why, when the Government and HMRC have stressed the importance of protecting businesses and jobs across the economy, is HMRC insisting upon ploughing on with the introduction of the DRC on 1 March 2021 which will have a substantial negative financial impact for a large number of businesses in the sector.

It is widely considered that many sub-contractors are unprepared for the cash flow impact that will arise as a result of the changes. Many businesses use the VAT that they collect from their customers as working capital before it is required to be paid to HMRC, which can be up to three months after payment has been received from customers. The loss of that working capital in affected businesses on top of the challenges posed by Coronavirus is inevitably going to result in financial difficulties for businesses which ultimately may be forced to close.

As well as preparing for the changes of the DRC by reviewing the system, process and people changes required, construction businesses whose main source of income is sub-contractor income should act now to model the anticipated cashflow impact of the changes to avoid any unexpected surprises from 1 March 2021. Main contractors who engage sub-contractors should also consider the commercial effect of this cash flow impact for sub-contractors to minimise the disruption for their business.

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