How Do Construction Companies Fund a VAT Bill

2 min read

March 2021When the CIS domestic reverse charge took effect

20%Standard VAT rate the customer now self-accounts for

Sub-contractorsMost affected — they stop charging VAT on labour

Ltd & LLPCredicorp lends to companies, not sole-trader individuals

Why the reverse charge squeezed construction cash flow

Before the reverse charge, a sub-contractor billing another VAT-registered contractor added 20% VAT to the invoice, held it, and paid it to HMRC at the quarter end. That collected VAT sat in the bank in the meantime — an informal, interest-free working-capital float many firms had come to depend on without ever calling it that.

Under the domestic reverse charge, the sub-contractor no longer charges that VAT on qualifying construction services to a VAT-registered contractor; the recipient self-accounts for it instead. The float disappears. A firm that was, in effect, borrowing HMRC's money for up to three months now has to fund its own outgoings from genuine trading cash — and many felt the gap immediately.

The knock-on effect on VAT position

Sub-contractors that mainly supply labour often flip into a repayment position — reclaiming more VAT on materials and overheads than they now charge out. That can be managed by moving to monthly VAT returns so refunds arrive faster, rather than waiting a full quarter for cash the business needs now.

Main contractors, meanwhile, carry a larger self-accounted VAT liability on their own returns. Neither position is a problem in itself, but both change the timing of cash in and out — and timing is where short-term finance earns its keep.

Funding the gap with short-term business finance

Where the removal of the VAT float has left a recurring shortfall, a short-term business loan or a revolving credit facility can bridge it. A revolving line is often the better fit: you draw only what you need for a given VAT quarter and repay as receipts land, rather than servicing a lump-sum term loan for a temporary gap.

Invoice finance is another route — releasing cash against certified applications rather than waiting on slow-paying main contractors. See how invoice finance works and how construction firms in particular fund materials and subcontractors.

Getting the numbers straight first

Before borrowing, model the real shape of the gap. Our VAT set-aside calculator and 13-week cash-flow forecast help you see whether the pinch is a one-off quarter or a structural change that finance should address. The reverse-charge guide on Learn walks through the mechanics in full.

This is general information, not tax or financial advice, and every company's VAT position differs. Confirm your treatment with your accountant.

Frequently asked questions

Does the reverse charge mean construction firms pay more VAT overall?

No — the total VAT reaching HMRC is unchanged. What changes is who accounts for it and when, which removes a short-term cash buffer sub-contractors used to hold. It is a timing and cash-flow issue, not a change in the amount of tax due.

Can I borrow specifically to cover a construction VAT bill?

Yes. Many limited companies use a revolving facility or short-term loan to smooth VAT and CIS obligations. Lenders assess the company's trading and pipeline, not the reason for the shortfall in isolation. This is illustrative and not an offer of finance.

Should I move to monthly VAT returns?

If the reverse charge has pushed you into a repayment position, monthly returns can accelerate refunds and ease cash flow. It is an administrative change agreed with HMRC. Discuss the trade-offs with your accountant before switching.