June 29, 2022

Construction PMI: ‘government should cut VAT and stamp duty’ and other responses from the industry

Following the release of the latest CIPS/IHS Markit Construction PMI figures this morning (Thursday 4 June), we gauge the reaction from various leading industry figures, as the sector strives to overcome the challenges posed by the Covid-19 pandemic.

Brendan Sharkey, Head of Construction and Real Estate at MHA MacIntyre Hudson, says the government should cut VAT and stamp duty and further delay the introduction of the domestic reverse VAT charge to sustain the sector

“We’re starting to see an uplift in activity but more activity does not necessarily mean more profit. Housebuilders in particular will be looking over their shoulders at the unemployment figures. If unemployment starts to rise we’ll see a corresponding fall in demand for new properties, which would ultimately lead to redundancies at construction sites.

“Businesses are treading carefully and don’t want to spend more than they have – cash is king. It’s positive that firms are watching their cashflow carefully, but of course a lack of investment will also work against any sudden uptick in demand.

“To help smooth the path back to profitability the government should lower VAT and stamp duty to stimulate the housing market, and invest in infrastructure. It should also delay again the imposition of the domestic reverse VAT charge*, currently scheduled to kick in on 1st October 2020.

“The reverse charge is not so onerous that it will itself cause businesses to fail but many companies have failed to adequately prepare for it. As the reverse charge directly impacts cashflow it could bring down otherwise viable but ill-prepared companies. Given it has already been delayed once, in less trying circumstances, logic suggests the government should press pause again.”

* The domestic reverse charge is a major change to the way VAT is collected in the building and construction industry. It means that the customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier of the service. It was originally scheduled to come into force on 1 October 2019 and has been delayed for 12 months to 1 October 2020.

Brian Berry, Chief Executive of the FMB, also believes that the declining construction activity outlined by the figures means the new VAT policy should be delayed.

“Small to medium-sized (SME) builders are safely returning to work, but important social distancing measures on sites are understandably hampering productivity. That this is having an impact on cashflow means it’s essential that the Government delays its introduction of reverse charge VAT by at least one year. This disruptive tax change risks hitting SMEs the hardest at a time when we need to protect jobs and livelihoods. Delaying this policy would acknowledge that SMEs provide the bedrock of the industry and help support the recovery of the construction sector.

“Looking ahead, we know that further support will be necessary to ensure SMEs lead the recovery of the industry. I’m calling for several key interventions, including a national retrofit strategy which will help us to reach net zero carbon and create jobs. I also want to see barriers removed for local house builders so they can bring forward more homes, and greater support for SMEs to train apprentices. These firms operate across the country, are crucial to their local economy and are therefore central to the Government’s ‘levelling-up’ agenda.”

Meanwhile Kate Kirby, Construction & Infrastructure Partner at global legal business, DWF, also commented on the CIPS/IHS Markit construction PMI figures for May 2020.

“Today’s figures unsurprisingly show a decrease in UK construction output in May. Despite some strong signs of recovery earlier in the year, the Covid-19 pandemic has hit hard. One of the biggest issues facing the sector, which has largely remained active during the Covid-19 pandemic, is the shortage of access to materials and appropriate subcontractors.

“There is a natural assumption that the sector would see a significant rise in claims and become very contentious, however, it seems generally relations between clients and their construction teams are very good and there is a willingness to act collaboratively to eliminate conflict and preserve commercial relations.

“There is clear support from the Government for the construction sector and they are actively looking to accelerate projects as part of the economic recovery plan. In a post–pandemic world, there will still be a requirement for more homes, urban regeneration, improved infrastructure, improved offices, retail space and more distribution facilities. We all know from past downturns that a robust construction sector will emerge but how and when, we just do not know. “

For his part, Gareth Belsham, Director of the national property consultancy and surveyors Naismiths, commented:

“Yes it’s awful, but crucially it’s less awful than April’s data. No-one is talking of green shoots, but some are daring to hope that the worst of the pain may be past.

“New orders are drying up and two thirds of construction firms saw activity fall across the month, but the pace of job losses is easing.

“With construction sites now reopened, albeit running at reduced efficiency as contractors implement social distancing rules, the question is moving to how badly will productivity suffer.

“Shortages of materials are forcing up input costs and steadily tightening the vice on contractors, so it’s little wonder sentiment has barely budged from April’s low.

“Pushing the restart button on a halted project is never easy, but there is at least the sense that the current teething problems are the industry’s first steps on the long road to the post-Covid world.”