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From 1 October the VAT rules change so that most contractors will stop paying the VAT element of their sub-contractors’ bills. But subbies will still have to pay VAT to their suppliers. That is going to hit your cash flow if you are a subbie.

The warning comes from Barry Ashmore of sub-contractor champion organisation Streetwise Subbie. He says virtually the whole of construction will have to bear the brunt of the new system.

Under this new procedure, VAT cash will no longer flow between businesses. With each business transaction, the VAT will be calculated as a paper exercise and registered on the invoice as a ‘reverse charge’. VAT will only be paid in the supply chain between construction firms and companies that are either employment businesses or merchants selling building materials. Payments between all other types of firms in the construction chain will pass ‘reverse charged’ and no VAT will be paid.

That means the majority of main contractors will stop paying their sub-contractors VAT even though the sub-contractors will still be paying it out for the materials and tools they buy. 

Barry says this has several major implications for sub-contractors and their cash flow: 

• they will still be paying VAT to suppliers and any sub-contractors they use, but will not be collecting it from the main contractor.
• cash flow will be hit until the end of each VAT accounting period
• sub-contractors will no longer be able to rely on VAT money for cashflow 
• the onus will fall on major contractors to pay large sums of money to the exchequer
• the whole of the industry will need to get to grips with the new accounting system or risk being mired in complex red tape
• the potential for confusion and manipulation is considerable.

Barry says: “No-one I have spoken to was aware of the ‘industry consultation’ that took place and the new system has come as a surprise to a lot of the Specialist Contractors I have spoken to about it.

“So, the best thing every specialist contractor, trade contractor and sub-contractor can do is to ensure that they are fully conversant with the new regime, and to plan for any cash flow shortfall that it is undoubtedly going to create.”

If you need any help to resolve any kind of payment problem, you can call Streetwise Subbie on 01773 712116. The organisation helps sub-contractors on a daily basis.