Domestic Reverse Charge for Construction; 10 practical steps to mitigate the impact on working capital
06 January 2020
The government’s recent announcement to delay introduction of the Domestic Reverse Charge for Buildings and Construction Services (DRC) until 1st October 2020 provides companies with an opportunity to appropriately plan and to take action to mitigate potential working capital impacts.
One of the biggest questions surrounding the change is the impact for companies on their working capital. Whilst businesses shouldn’t be relying on HMRC monies to fund working capital requirements, in reality they may be doing so. The new legislation means that, for a time, your business may have up to 20% less working capital for up to 90 days when the DRC is introduced.
We have prepared a list of 10 practical steps to prepare your business and ensure that you mitigate or avoid any working capital issues caused by the introduction of the DRC.
Construction businesses typically operate on low margins. There is also the perception that payment practices within the sector are poor and that the culture towards this needs to change. There are other regulatory requirements and initiatives which have been introduced to address payment performance which will also have a potential impact on working capital:
- Duty to Report on Payment Practices – introduced to create transparency of payment practices and performance for large UK companies
- Cabinet Office announcement that as of 1st September 2019, companies that wish to bid for public contracts in excess of £5m should be able to demonstrate the ability to pay 95% of their suppliers within 60 days
- Prompt Payment Code – voluntary code for signatories to demonstrate commitment to fair payment practices within the UK
- Construction Supply Chain Payment Charter – introduced to address specific challenges within the sector
The ongoing government focus on payment fairness, companies cannot simply look to push out supplier payments to cushion some of the cash flow impact of the DRC. The introduction of IR35 in April 2020 should also be considered as it has a potential to impact cash outflows.
Supply chains may become more fragile and interdependencies will have to be managed well. Whilst it is hoped that the ‘end user’ will try to mitigate some of the impact in order to retain a healthy supply chain, there is an opportunity for affected companies to take control. Whilst the Receivables position may be impacted initially, this will also be true for payments to your suppliers and sub-contractors. It is therefore critical to understand the impact of DRC on your business. It is a chance for companies to proactively assess their end-to-end working capital management and identify opportunities to optimise processes to provide a source of competitive advantage.