Andrew Dixon, commercial director specialist finance, Aldermore
2020 was an unprevented year for UK construction SMEs. The Covid-19 pandemic put the brakes on economic activity, caused significant supply chain disruption, and hit business confidence hard. But now as 2021 gets underway, the medium-term prospects look brighter. The vaccination rollout is providing hope that the pandemic will be brought under control even if we’re in the middle of a third national lockdown. For nimble and innovative SMEs, their strong foundations will be needed to tackle some of the upcoming challenges of 2021, notably the reality of Brexit and changes to VAT reverse charging and IR35 legislation
As one of the least affected sectors by the Covid-19,
the construction sector was fortunate as building sites only had to close for a limited time during the first lockdown last year. Although extra measures (and costs) had to be incurred to ensure that sites could operate in a safe manner, construction firms were fortunate compared to their counterparts in areas such as hospitality and transport.
Recent data from the ONS shows that the construction industry recorded a seventh consecutive month of growth in November 2020 since the record decline of 40.7% in April 20201. Encouragingly, all construction output has now recovered above its pre-pandemic level for the first time. Sentiment among SME construction firms is also more upbeat; nearly half of construction decision makers (47%) described their overall mood now as positive according to UK Finance’s most recent SME Finance Monitor, up from just 19% in Q2 20202.
Yet whilst the construction sector fared relatively well during the pandemic in comparison to other industries, Brexit uncertainty still lingers. It will take some time for the new trading conditions to settle and it is quite possible that we’ll see some teething problems as everyone gets used to the new regime. Aldermore’s research found that many SMEs in the sector had made little arrangements for such disruption, with 40% of construction SMEs saying that they had made no preparations for Brexit3. On a positive note, it was a huge boost to businesses that a trade deal was agreed, the absence of any tariffs or quotas being a key win
Alongside Brexit, there are other important changes coming down the track early this year too. One is VAT ‘reverse charging’ that is due to come into effect in March. This means that VAT-registered businesses within a supply chain in the construction industry will no longer charge or receive VAT between themselves.
The cash flow implications of these changes could be significant. Many building firms and sub-contractors have become accustomed to receiving VAT, and indeed use it as a form of liquidity before they pay monies owed to HMRC at the end of the quarter. This money will stop coming in from March, putting cash flow pressure on businesses as they adapt to the new system.
Another development is changes to ‘off-payroll working’ rules (IR35) that will take effect in April. Under this change, contractors whose main or whole work is for one employer will need to be treated as full-time staff subject to PAYE deductions. The impact of this for employers is mainly administrative. The much bigger impact is on the individuals themselves, as they will see a drop in their weekly or monthly income. It will be important to liaise with these individuals and make sure they are aware of the changes coming.
Considering all these factors together, it is clear that although the outlook is improving, there are a lot of hurdles ahead for construction firms to negotiate. Construction is one of the cornerstones of the UK economy and has a key role to play in the post Covid-19 recovery. At Aldermore, we are committed to backing the industry through good times and bad and have a range of finance solutions specifically developed for construction SMEs. We look forward to working closely with clients in the sector throughout this crucial recovery period and grasping the opportunities beyond.
You can contact the Aldermore construction finance team on 03339997577 or visit our website aldermore.co.uk/constructionfinance.
1https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/bulletins/constructionoutputingreatbritain/november2020
2SME Finance monitor, an independent report by BVA BDRC, November 2020
3Research conducted by Opinium Research between 23 October and 04 November 2020 with a nationally representative sample size of 1,003 senior decision makers in UK SMEs
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