Cash flow issues
2,000 construction firms at risk as support ends
Construction workers facing uncertainty (Shivendu Shukla)
On in ten construction firms or sub-contractors in Scotland – equal to more than 2,000 companies – could be forced out of business as temporary protection measures introduced during the pandemic are withdrawn, says a restructuring specialist.
Those safeguards, including restrictions on winding-up processes and the suspension of wrongful trading rules, have likely prevented a significant number of business failures, says Blair Milne, head of restructuring at Azets in Scotland.
Mr Milne, head of restructuring at Azets in Scotland and a specialist on the construction sector, is warning that the withdrawal of this support comes on top of the introduction of new VAT and IR35 taxation rules.
Sub-contractors are expected to be disproportionately affected with many businesses and sub-contractors under pressure to continue trading.
There are around 21,000 construction businesses in Scotland employing 143,000.
Blair Milne: cash flow pressure
Explaining the new VAT and IR35 rules, Mr Milne said: “The VAT reverse charge system introduced on 1 March this year means that VAT must now be paid directly to HMRC by the main contractors rather than be passed down the supply chain to sub-contractors.
“Many sub-contractors will have previously used VAT to assist with their cash flow prior to their quarterly VAT return. This cash flow benefit is now being removed in its entirety and many small businesses or contractors will not have the reserves to continue trading.
“Cash flow pressure will be further impacted for many following the new IR35 legislation which will require more contractors to pay tax and NIC directly from their pay.
“The end of the moratorium and withdrawal of the Furlough scheme will almost certainly result in main contractors refocusing their cash flow priorities, potentially to the detriment of sub-contractors and those impacted most by the recent VAT and IR35 changes.
“Unfortunately, the outlook for the construction sector and sub-contractors in particular is very uncertain, and we are likely to see a significant number of smaller businesses close and sub-contractors leaving the industry.
“Wider issues such as raw material and labour supply shortages, rising costs, reduced margins and ongoing trading uncertainties arising from the pandemic are well documented and simply add to the scale of the pending problem.
“Regrettably, we could see around 10% of construction businesses and sub-contractors either failing or closing voluntarily by the end of 2022.”
He urged concerned business owners to act sooner rather than later: “Directors and owners concerned about these changes should review their trading and cash flow forecasts as a priority and maintain a regular dialogue with their banks and funders.
“Careful and early planning could help many businesses lessen the impact of these issues and from the cash flow pressures arising from the withdrawal of support measures at the end of September.”