CONSTRUCTION CASH CRUNCH LOOMS WHEN MORATORIUM ENDS

The construction sector in London and the South East could see a high risk of business closures with the expiry of temporary measures introduced under CIGA (Corporate Insolvency and Governance Act 2020) and the removal of financial support schemes such as Furlough, both due to end on 30th September, a leading construction sector restructuring specialist is warning.

CIGA introduced a number of temporary measures to provide protection for businesses impacted by the pandemic and for directors running companies that have become insolvent. Those temporary measures, including restrictions on winding-up processes and the suspension of wrongful trading rules have likely prevented a significant number of business failures.

Additional measures, such as the Furlough scheme and government-backed loans and grants were also introduced to sustain employment levels and provide businesses with vital cash flow and the time to adapt to the pandemic.

Stephen Grant, Head of Restructuring at top ten accountancy firm Azets for London and the South East and a specialist on the construction sector is warning that the end of the temporary measures introduced by CIGA and the withdrawal of financial support schemes, together with the introduction of new VAT and IR35 taxation rules will cause serious problems for the construction sector. Sub-contractors are expected to be disproportionately affected with many businesses and sub-contractors unable to continue trading.

Explaining the new VAT and IR35 rules, Stephen Grant said: “The VAT reverse charge system introduced on 1st March this year means that VAT must now be paid directly to HMRC by the main contractors rather than be passed down the supply chain to sub-contractors. Many sub-contractors will have previously used VAT to assist with their cash flow prior to their quarterly VAT return. This cash flow benefit is now being removed in its entirety and many small businesses or contractors will not have the reserves to continue trading.

“Cash flow pressure will be further impacted for many following the new IR35 legislation which will require more contractors to pay tax and NIC directly from their pay. The end of the moratorium and withdrawal of the Furlough scheme will almost certainly result in main contractors refocusing their cash flow priorities, potentially to the detriment of sub-contractors and those impacted most by the recent VAT and IR35 changes.”

He added:

“Unfortunately, the outlook for the construction sector and sub-contractors in particular is very uncertain, and we are likely to see a significant number of smaller businesses close and sub-contractors leaving the industry. Wider issues such as raw material and labour supply shortages, rising costs, reduced margins and ongoing trading uncertainties arising from the pandemic are well documented and simply add to the scale of the pending problem. Regrettably, we could see around 10% of construction businesses and sub-contractors either failing or closing voluntarily by the end of 2022.”

Stephen Grant concluded by commenting:

“All businesses in the sector face the same challenges but they should be aware of the risks facing them and plan strategically to navigate their way through. Cashflow planning is going to be vital to survival along with keeping a close eye on margins. Funding will be available to those businesses that can present a credible business plan. Directors and business owners should establish at an early stage their funding requirements and then ensure they have a strategy in place to ensure they have the requisite funding in place.”