Upcoming cash flow risks in the construction sector
Whilst the construction sector has shown strong growth over the last few months, companies operating within the industry should not be complacent. The impact of Brexit and the COVID pandemic are still being felt across the sector and wise businesses should remain vigilant of potential pitfalls on the horizon.
One such concern are the potential risks that may be felt with regards to company cash flow.
VAT Domestic Reverse Charge
One recent tax change that came into effect is HMRC’s new VAT Domestic Reverse Charge for building and construction services. This took effect from 1 March 2021 and applied to companies which are registered under HMRC’s Construction Industry Scheme.
The change means that rather than the supplier charging and accounting for the VAT, the recipient of those services accounts for the VAT due on those construction services directly to HMRC, rather than to their suppliers, which will inevitably have a significant impact on the affected business’ accounting practises and cash flow.
Prior to this change, it was not uncommon for suppliers in the sector to use the VAT they were paid by their customers to fund payments to their suppliers, until they had to pay it to HMRC with their next VAT return. However, now, payments will be received net of VAT and this may leave businesses struggling to pay their suppliers. Careful cash flow planning is needed to ensure that the new regime does not cause businesses to experience financial difficulties, which may in turn lead to insolvencies or other supply chain difficulties.
Emergency COVID Loan Repayment
Throughout the pandemic the UK government has offered a range of emergency loans to UK companies. These loans include the Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS).
A recent publication from the British Business Bank shows that the construction sector received the highest proportion of total loans (17%) with a value totalling £11.7bn.
Whilst these loans provided businesses with much-needed breathing space and reduced cash flow concerns for many during that period, these loans are now starting to become repayable and these repayments will impact companies’ cash flow.
Over the last few months, 5-10% of businesses that used the government’s £47.4bn BBLS support scheme have missed repayments. This in turn has led to officials and bankers estimating as much as £5bn of emergency loans are at risk of not being repaid.
If a company is struggling to make their repayments on BBLS loans, support is available via the government’s pay as you grow scheme, but availing yourself of this scheme will mean borrowers will pay more interest overall and the length of the loan will increase in line with any repayment holidays taken. It is also worth noting that whilst the pay as you grow scheme will not affect a borrower’s credit rating, it will affect lenders’ future creditworthiness assessments of those companies as the lender will consider a business’s total debt exposure, which will include the outstanding BBLS facility.
Availability of the Recovery Loan Scheme
Companies that are experiencing cash flow concerns may consider using the government’s Recovery Loan Scheme (RLS). However, this may be easier said than done.
The RLS is supposed to help businesses of any size access loans so they can recover after the pandemic. The scheme was launched in April and is open until 31 December 2021. It is designed to provide a bridge between the emergency loans mentioned above and more normal credit conditions.
However, lenders recently warned that lending under the RLS is set to be a fraction of the level of previous pandemic credit schemes and that companies that want to access the scheme are already reporting difficulties in securing loans, with many reporting that they have either been turned down for the scheme or that they had simply been left waiting for a verdict by their lender.
In addition, unlike earlier emergency loans, fees must be paid from the start on RLS loans and lenders are allowed to ask for personal guarantees from directors on loans over £250,000. Borrowing businesses must show that they would be viable were it not for the pandemic and that they were adversely affected by it. Lenders are free to set the cost of loans, but must demonstrate to the state-owned British Business Bank that they are passing on the benefit of the government guarantee to customers.