Building projects are the backbone of the UK’s economy, accounting for around 7 per cent of the country’s overall GDP. Changes in tax compliance and material costs has raised interesting questions about the state of the construction sector and its ability to deliver sustainable, high quality infrastructure that is fit for the future.
To ensure the continued success of the industry, construction businesses need to have an understanding of the current changes in tax legislation and how this has affected the sector as a whole.
Changes in Legislation
From March 2021, the industry saw some changes to ensure that businesses within construction are adhering to VAT compliance. They were brought into place to support business owners with the long-term impacts of the virus.
HMRC reports that around £110m of revenue is lost every year within the construction sector as a result of fraud. The domestic VAT reverse charge was created as an addition to the Construction Industry Scheme (CIS). It ensures that VAT is being reported correctly and transfers the responsibility to the contractor rather than the supplier.
The buyer will account for the VAT on their VAT return, and the supplier issues a reverse charge invoice to cancel each other out when reviewed by HMRC.
Rising cost of materials
These new tax implications need to be taken into account when buying goods both in the UK and internationally. According to the Office of National Statistics, rising tax has had implications on the cost of construction materials, with prices in 2022 rising by 24 per cent.
The COVID-19 pandemic and war in Ukraine have affected the global construction industry due to supply chain bottlenecks, rising fuel costs and labour shortages.
With Brexit thrown into the mix, the UK is feeling the impact of the European Union’s tariffs and is subjected to rising shipping costs and temporary surcharges. This in turn leads to higher shipping fees and material costs.
Smaller companies struggle
Nearly 90 per cent of the construction industry is made up of smaller companies, which will feel the brunt of rising costs. Compared to larger companies that can stockpile resources, smaller-scale projects are being interrupted, delayed, or completely scrapped as prices continue to increase.
This is not to say that larger companies aren’t also feeling the pressure. Though they are better at weathering the storm, bigger businesses are experiencing inflationary impacts. Businesses of all shapes and sizes must look to get the best prices and ensure they have their revenue and profits so they know how viable their organisation is.
Whatever the size of your business, systems such as the CIS are in place to support your tax requirements and help you stay compliant.