Partner Article

Challenges for construction in 2021: Everything you need to know and how to prepare

From the introduction of the VAT reverse charge to Brexit, experts predict even more change in the construction industry this year.

Specialists from Chartered Accountancy practice, Sheards Accountants look at some of the biggest changes and themes within the construction industry in the next 12 months. As well as how they might affect businesses and how accountants can support.

Skills shortage: Before the COVID-19 pandemic, the construction industry was facing a skills shortage. Looking at construction output in the UK over the past 12 months, all construction work fell by 12.5% compared with 2019. This was the largest decline in annual growth since 2009 where output fell 13.2%(1). This decrease hints that the issue of labour shortage is set to continue into 2021.

In November of last year, data from the Office of National Statistics (ONS) revealed that redundancies during the pandemic had resulted in the lowest number of people employed in the construction sector since 2013(2). However, with work now beginning again across many sites, it’s anticipated that more positions will become available.

Kevin Winterburn, director at Sheards Accountants says: “The pause in training and completed projects in 2020 could mean that the skills shortage has worsened, with fewer trained individuals ready to enter the workforce. But businesses should be encouraged to think about the future and the role they can play in upskilling new workers in the industry.”

“The government has recently announced a number of new grants and support measures which aim at supporting businesses to employ new workers including apprentices. For many construction firms looking to grow their workforce in light of an anticipated pick up in work, making use of these new and improved schemes and grants could be a good way to strengthen their teams in 2021. Firms should speak to their accountants about the schemes and how they can take advantage.”

VAT reverse charge: HMRC’s new VAT domestic reverse charge for building and construction services came into effect on the 1st of March 2021.

The reverse charge applies to all CIS registered businesses buying and selling construction services that are subject to CIS reporting, apart from those that are zero-rated, up to the point in the supply chain where the customer is the end-user. At this point, the normal reporting and collection of VAT resume.

Where the reverse charge applies, rather than the supplier charging and accounting for the VAT, the recipient of those supplies accounts for the VAT. In practice, this will mean that where there is a chain of contractors/subcontractors working on a building project, for example, none of those entities will add VAT to their invoices, other than the main contractor who is invoicing the end-user of the property.

One of the biggest challenges for businesses in the sector is cash flow and a recent survey revealed that 1 in 5(3) construction companies say cash flow is a constant problem, as well as 84%(4) of construction companies reporting that they had problems with cash flow.

Kevin comments: “With the new VAT domestic reverse charge from 1st of March 2021, we predict this could have a negative impact on the already stretched cash flow issues in the construction industry. It’s important for firms to review their existing work pipelines and relationships in light of the change.”

IR35: The changes to the IR35 legislation come into effect on the 6th of April 2021. From this date, medium and large companies will be responsible for determining the employment status of any contractor and personal service companies (PSC). Essentially meaning that companies must determine if these workers are ‘inside’ or ‘outside’ IR35.

This change means contractors and PSCs are no longer responsible for performing this assessment or for the potential tax or National Insurance contributions liability. The change to the legislation will bring the private sector IR35 in line with the public sector, which saw the same reform in 2017.

Kevin adds: “In light of the upcoming change, we recommend undertaking a review of your contractors and PSCs, as well as your wider supply chain to ensure you are fully aware of your obligations and any liabilities in the event of non-compliance.”

Brexit: One of the biggest challenges businesses will face in 2021 is Brexit. The end to the right to free movement and the introduction of a points-based immigration system could put an end to construction firms employing workers from the EU. Based on this, experts predict these changes could drive up the cost of labour by as much as 10%.

On top of this, Brexit could mean supply issues with construction materials. The EU/UK post-Brexit trade agreement, which came into effect on the 1st of January 2021, introduced measures to ease restrictions on the flow of goods between the EU and the UK. However, increased customs checks, assessments, duties, and restrictions on products from outside the UK and EU could cause delays, shortages, and an increase in costs.

The Builders Merchants Federation (BMF) has already warned that congestion at UK ports is affecting the availability of construction materials. It has also been reported that material prices are up 20% on certain products.

Kevin says: “Now that the UK is no longer a member of the EU, it has lost access to the European Investment Bank (EIB) and the European Investment Fund (EIF). Historically, these institutions have invested large amounts in major infrastructure projects and SMEs. This loss of funding could cause issues with the delivery of large infrastructure projects and start-ups in the UK.”

“If your business moves goods between the UK and countries in the EU, you’ll need to follow new customs and tax rules due to Brexit. We understand this means a lot of changes, and HMRC can help you navigate with the SME Brexit Support Fund. Firms should contact their accountants or HMRC directly to learn more about the available support.”

Sustainability: A critical issue that the construction industry has been facing in recent years, is adopting sustainable practices. This challenge comes with many areas for consideration, including the cost of changing ways of working to be more sustainable.

The World Green Building Trends 2018 Smart Market Report revealed that almost 40% of UK firms reported affordability as the biggest challenge posed by adopting sustainable construction practices. Almost 50% stated that they expected green buildings to incur higher first costs.

However, construction firms can also see cost savings by implementing sustainable methods such as reducing waste and increasing energy efficiency. Other benefits of sustainable building products are the increased demand for them in the market.

Kevin says “In order for businesses to upgrade their tools or move to a more sustainable way of working they’ll need to think about cash flow and how much they can afford to invest. We would suggest working with your accountants to form a realistic time plan and look at work funding or grants that may be available to support these changes.

“To encourage capital expenditure and business growth, the government recently unveiled a new ‘Super Deduction’ tax relief. The idea is that companies will be able to claim a deduction from their tax bill if they invest in new plant and machinery for their business, which could help construction firms move towards a more sustainable way of working. Under the super deduction, you are allowed a capital allowance of 130% on your qualifying plant and machinery investments. We’ve developed a full guide to this new measure which you can see here.”

Summarising the challenges facing the industry in 2021, Kevin Winterburn adds: “With new regulations and ways of working coming into play in 2021, the industry is set for another busy year. It’s essential for businesses of all shapes and sizes to understand how these issues and changes may impact them and speak to their accountants about how they can best prepare.”

This was posted in Bdaily's Members' News section by Katrina Cliffe .