Top finance tips for the construction sector

The construction sector has experienced a sustained period of challenge, the weak period of trading many experienced Q2 to Q3 2020 due to Covid has caused finance challenges to continue. Whilst some of these challenges were relieved by good cash…

Blog1st Mar 2021

By Derek Gemmell

The construction sector has experienced a sustained period of challenge, the weak period of trading many experienced Q2 to Q3 2020 due to Covid has caused finance challenges to continue. Whilst some of these challenges were relieved by good cash management, payment holidays and changes to compliance requirements, the upcoming 2021 Budget announcement and the ongoing Covid problem means now is the time to ensure you are best placed to overcome any impending hurdles.

We captured thoughts for businesses in the construction sector to consider as a priority:

  • From 1 March 2021 reverse charge VAT is introduced to the Construction Sector with companies being obliged to ensure their systems correctly operate reverse charge arrangements where required. Software providers have been working for some time to ensure their software can meet the requirements of this implementation but companies will not become aware of all the practicalities of these new rules until they are introduced and have been working for a number of months. We recommend finance controllers / directors gain insight from a 3rd party VAT specialist to ensure they have considered how this will impact their VAT recording and reporting obligations.
  • Construction sector groups considering restructuring are advised to progress these changes as soon as possible to prevent any obstacles being introduced by the forthcoming Budget announcement on 3 March 2021.
  • We recommend companies consider capital expenditure where possible in order to take advantage of the generous tax relief available through Annual Investment Allowances (AIA’s). This provides relief against profits subject to Corporation Tax for the first £1m of qualifying fixtures, fittings, plant and machinery incurred by a company or group in a tax period. The £1m limit has been kept in place until 1 January 2022 unless unexpectedly amended in the March 2021 Budget.
  • Many employee incentive arrangements are now under water due to Covid’s on the value of companies. We recommend such arrangements are reviewed to ensure they still provide the intended incentives or whether they require to be revised in order that key management’s objectives can remain aligned to those of the shareholders.  With Budget 2021 looming this should not be delayed.
  • Leverage governments assisted finance where possible while it is available to supplement working capital and growth financing. Should it not be required it can be paid back.
  • With the new IR35 Off Payroll Working rules applying to the private sector from 6 April 2021, we recommend companies review their contractual arrangements to ensure they are aware of their obligations under this proposed legislation in order that unexpected liabilities are avoided. Although the introduction of these rules has been delayed, HMRC’s communication suggests this change will be introduced as expected.

Looking beyond April 2021, we find ourselves using the phrase “Cash is King”, and for the construction sector cash must continue to be King for the foreseeable. Businesses should be focused on getting to a position where they can produce timely and accurate cashflow information, to enable them to react quickly and effectively. Some of key areas to consider include:

  • Tracking working capital is essential to ensure a company or group will have the cash required in order to complete projects. With the availability of cash limited, diligent and regular revisiting of working capital requirements are essential.
  • Having open conversations and gaining agreement around payment terms and milestones for all projects with customers continues to be extremely important and drives the working capital plans.
  • Utilisation of data mining tools to establish a real time dashboard of the business key metrics. This management information allows the leaders of the business to quickly react and investigate operational risks.
  • Embrace digital solutions. The COVID-19 pandemic has accelerated most businesses into the 21st Century with digital communication now becoming the norm as it was necessary to keep trading. How can further digital solutions enhance your business?

With some significant changes coming to the sector, and for business generally, in the next few months we recommend that each of the areas

If you have any further questions, please contact Head of Construction & Property, Derek Gemmell or your usual AAB contact.

You can find out more about AAB’s Corporate Tax team here.

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