By Kristy Dorsey
Thousands of construction firms in Scotland face a “high risk” of closing in the coming months as new tax rules and the end of government financial support combine to create pressure that will be felt particularly by sub-contractors.
The warning from restructuring specialist Azets comes as furlough has started winding down to its eventual closure in September. The end of the employment support scheme also coincides with the expiry of temporary measures introduced under the Corporate Insolvency and Governance Act 2020 (CIGA) to protect business impacted by the pandemic.
The temporary CIGA measures included restrictions on the winding-up process that have suppressed the official number of business failures so far during the pandemic, leading to warnings of rising numbers of “zombie companies”.
READ MORE: Interpath Advisory chief Blair Nimmo mulls ‘zombie’ question as failures stay low
Blair Milne, a specialist in the construction sector with Azets, said these changes together with new VAT and IR35 taxation rules could put up to 2,000 of Scotland’s 21,000 construction firms at risk of failure.
“The VAT reverse charge system introduced on 1st 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,” he explained.
“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.”
READ MORE: UK construction growth accelerates but shortages fuel inflation
New IR35 legislation requiring more contractors to pay tax and NIC directly from their pay will bring additional pressure.
“The end of the moratorium and withdrawal of the furlough scheme will almost certainly result in main contractors refocusing their cashflow priorities, potentially to the detriment of sub-contractors and those impacted most by the recent VAT and IR35 changes,” he said.
“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.”
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