Contractors face crisis as new VAT rules are enforced

Building contractors face a cashflow crisis and penalties following a change to VAT rules on building projects.

Under the new rules – applying to projects completed after 9 December 1997 – the VAT payment deadline has shifted, and contractors must pay the outstanding tax on the full value of the contract within 18 months. Previously VAT was only due when the final invoice was issued, often several years after completion.

Mark Smith, VAT expert at Arthur Andersen’s real estate division, warned: ‘Most accounting systems will not take the new time limit into account, and there are potential penalties for late payment of VAT.’

The new regime could also hit contractors’ cashflow. Building companies are often allowed to retain a proportion of the builders’ fees in the case of a dispute, and disputes are common.

But under the new rules the contractor will have to pay VAT on the full value of the contract regardless of whether their fee has been retained.