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Azets: Construction sector at high risk of business closures

By Karolina Skinner
4 August 2021
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Hampshire and Dorset’s construction sector could see a high risk of business closures with the expiry of temporary measures introduced under CIGA (Corporate Insolvency and Governance Act 2020) and the removal of financial support schemes such as furlough, both due to end on 30 September, warns Azets.

CIGA introduced a number of temporary measures to provide protection for businesses impacted by the pandemic and for directors running companies that have become insolvent as a result. Those temporary measures, including restrictions on winding-up processes and the suspension of wrongful trading rules have likely prevented a significant number of business failures.

Additional measures, such as the furlough scheme and government-backed loans and grants were also introduced to sustain employment levels and provide businesses with vital cash flow and the time to adapt to the pandemic.

Duncan Swift (pictured), restructuring partner at accountancy firm Azets in Southampton and a specialist on the construction sector, is warning that the end of the temporary measures introduced by CIGA and the withdrawal of financial support schemes, together with the introduction of new VAT and IR35 taxation rules will cause serious problems for the construction sector. Subcontractors are expected to be disproportionately affected with many businesses and subcontractors unable to continue trading.

"Regrettably, we could see around 10% of construction businesses and subcontractors either failing or closing voluntarily by the end of 2022."

Explaining the new VAT and IR35 rules, Swift 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 subcontractors. Many subcontractors 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 subcontractors and those impacted most by the recent VAT and IR35 changes.

"Unfortunately, the outlook for the construction sector and subcontractors in particular is very uncertain, and we are likely to see a significant number of smaller businesses close and subcontractors 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. 

Swift concluded by commenting that "all businesses in the sector face the same challenges and should plan strategically to navigate their way through. Cashflow planning is going to be vital to survival along with keeping a close eye on margins. Funding will be available to those businesses that can present a credible business plan. Directors and business owners should establish at an early stage their funding requirements and then ensure they have a strategy in place to ensure they have the requisite funding in place."