UK law currently requires most companies to pay VAT within 30 days of the end of the VAT quarter. The Financial Times recently reported a proposal to extend the payment period for smaller companies, suggesting that it could rise to 90 days. The proposal is intended to improve cash flow for small companies, who are finding it especially hard to get bank finance.
The proposal has sparked debate. The Federation of Small Businesses and the Institute of Directors, both of whom have significant membership from the construction and engineering industry, agree that the proposal should be explored. There is even a petition on the 10 Downing Street website supporting the extension.
Over the years there have been many calls to help the construction industry by reducing various aspects of VAT, usually focussed on house-building (for example, last year’s RICS position paper). The concern has to be that such a measure would reduce government funds without addressing the fundamental economic problems, which are a need for improved access to bank credit and stimulus to increase construction activity. Even if further action needs to be taken on VAT, the construction and engineering industry may prefer a universal reduction in VAT from 15% or reductions targeted at specific areas of the industry, such as materials.
It remains to be seen if anything comes of this latest proposal. If you support it, why not add your name to the petition? At the moment it has fewer signatures than the petition to make August 1 an official “Yorkshire Day” public holiday.
In the meantime, construction companies with immediate concerns about their tax position should contact the HMRC business payment support service, which allows businesses to spread tax payments over longer periods.
This is a proposal that seems to come up with some regularity. I guess that in the current climate, this is a way of borrowing money, and not a very good way, given that we swap one immovable date for another. There must be better ways of borrowing, rather than holding on to tax revenues. My gut feeling is that these businesses don’t need more debt, they need investment. The big problem with construction companies is that they have so little capital, it is difficult to weather a recession. As a cash-flow business, what else have they to go at other than cash? Although it is no help in the short term, the long term solution is for contractors to invest their surpluses in the business, and build up some capital assets against which they can borrow in the lean times. Is there any other way of ensuring long term survival of a company?