This is the second blog in our series about the ups and downs of the construction sector in 2020. In this blog, we focus on the impact of Brexit and VAT issues for the sector. In the final blog we will offer the download of the full report for free, so follow this blog series closely.
Impact of Brexit
The transition period outlined by Brexit has ended on the 31st of December, 2020. Though the specific date is only the end of a large transition, it still marks a new era. Even though the UK’s construction sector is as strong as it has ever been, Brexit may introduce a few additional challenges, as well as benefits.
- A significant proportion of the building materials used in the UK are imported from the EU. Access to these materials will become more difficult once the UK has achieved planned economic separation from the EU.
- Labour will become more difficult to find as immigration laws shift and make it more difficult for workers to come to the UK from the EU.
- Brexit may increase and adapt demand for certain portions of the construction sector, with a potential favour towards ‘clean energy’ projects.
- Building style and regulations may also change as a result of political turmoil.
64% of building materials used in the UK are imported from the EU
- 64% of building materials used in the UK are imported from the EU.
- 63% of construction materials exported from the UK go to the EU.
- 8% of the UK’s construction workforce come from the EU.
Legislation, fiscal, tax, VAT
VAT issues for the construction sector fall into two areas:
- The impact of the tax on the management of the business itself – how does the business manage its cash flow in the VAT context? How does it ensure its subcontractors are not exposed to failure from poor VAT compliance and adversely affect project timelines? This includes any type of job in any sub-sector of construction.
- How does a construction firm ensure that when bidding for client projects that it considers the most optimal VAT strategy from the perspective of the client? Determining the VAT liability of construction services is affected by where the building takes place; the nature of the construction works being undertaken, the type of client, the use to which the building will be put or the physical design of the building. As contractors innovate both in the nature of their build services as well as in their contractual arrangements with clients VAT regulations often need to be revisited to ensure compliance – Can a modular building or its kit benefit from VAT zero rate treatment under the construction services provisions?
With the backdrop of COVID, the needs of the property market have in itself created VAT complexities for the sector. Many city centres where University residential accommodation has created a wealth of development projects are now seeing those buildings not in occupation by University students but used for “serviced flats” for non-student markets, short-stay accommodation for key workers, temporary isolation units for NHS staff, or use by the council for homeless accommodation. All of these changes will bring with them VAT implications certainly for the client using the accommodation but could ripple back into those construction projects where projects are still in the process of completion.
The pressure for lease variations from tenants is an increasingly common area of discussion and VAT consequences could arise
In the economic reality of the current environment, some firms will undoubtedly pick up contracts as a result of the financial demise of other suppliers – again creating complexities potentially from the VAT side to consider. Suppose your business is more focused on investment and development than building. In that case, the pressure for lease variations from tenants is an increasingly common area of discussion and VAT consequences could arise.
Supply chain issues
Issues arise across the supply chain within construction projects, and it’s not just from the perspective of construction services. Allied trades and equipment suppliers need to establish they have VAT on their radar. One recent example involves a machinery hire contractor who had a client based in the EU who they were invoicing for supplies and not charging VAT on the basis that the customer was outside the UK – the issue was, however, that the site on which the equipment was being used was here in the UK – making the supply in this instance subject to the UK Standard VAT rate (20%).
If this alerts you to the range of VAT complexities that this sector needs to manage then equally, it’s important to identify the routes to resolution.
The state of climate change and the adverse effects that aspects of modern life have on the environment have raised awareness and created a drive to reduce both emissions and consumption. Multiple sectors are working diligently to minimise, if not offset, the emissions they generate by providing funding for environmental-protection research, lower resource consumption, and paying environmental tax to assist the government in its goal to achieve net-zero carbon in 2050.
More sustainable building
The construction sector has been facing some pressure as more and more sectors succeed in reducing carbon offsets. The construction sector contributes only a fraction of revenue from environmental tax; however, especially in comparison to the transportation sector. This relieves the immediate pressure on industry leaders to adapt to new techniques and technologies immediately, especially during 2020 with the global pandemic.
Education, collaboration and investment can help propel the construction sector towards the goals set by the government and the populace
To achieve the challenges the government sets on sustainability, the construction industry, as well as its employees, will need to continue to be aware that they can take many positive steps to more sustainable building practices via education, collaboration, innovation, and investment. These, in combination, on a small scale (at the business level), can help propel the construction sector towards the optimised and efficient goals set by both the government and the populace.
In the upcoming blogs, we’ll talk about the Government Construction Sector deal, skill shortage, and payment delays, and we identify possible adaptations or solutions that help guard against any negative effects that may result from these influencers.
Xeinadin supports businesses in the construction sector. Visit our sector page for more info and an overview of the services we offer, or contact us directly if you need advice from one of our (local) business advisors.