VAT finance for construction businesses

How cash moves in construction

Materials and subcontractors usually have to be paid well before the related stage payment arrives. VAT can become payable on invoices that have been raised but not yet settled.

Why VAT can put pressure on working capital

A VAT quarter that includes a large valuation can produce a substantial liability at exactly the point when cash is committed to the next phase of work.

Paying the full amount from reserves can leave less available for materials, labour and retentions still outstanding.

An illustrative example

A contractor has a quarterly VAT bill of £48,000. It has £28,000 of cash it is comfortable allocating, with the rest earmarked for materials on a new site.

The contractor could look at financing the £20,000 balance rather than the whole liability. Figures are illustrative and finance involves an additional cost.

How VAT finance may work

The business applies for finance for all or part of the VAT liability. If approved, the funds are used towards the VAT payment and the business repays the finance provider over the agreed term.

Things to consider

• When outstanding valuations and retentions are realistically expected to be received
• Whether repayments fall at points when stage payments are due in
• How domestic reverse charge rules affect the size of the VAT liability
• Existing facilities, such as an overdraft or invoice finance

Eligibility depends on the business and the finance provider, not on its sector alone.