With Covid-19, Brexit and continued financial instability, 2021 looks set to be a challenging year for the construction sector.
Each new year brings with it a raft of challenges for the construction industry across the UK. This year has seen the added challenge of Covid-19, which has affected labour and supply lines. As much as we would like to leave the issues caused by Covid in 2020, they are going to follow us into 2021, adding to challenges that firms will need to meet.
In 2021, you’re likely to experience many of the roadblocks that have caused problems for the industry for the last few years. On top of these and Covid challenges is new legislation that needs to be addressed by construction companies in order to see a successful 12 months.
Ongoing skills shortage
Even before we were hit by Covid-19, there was a skills shortage in the industry. While the pandemic may have slowed down some projects and shutdown others, this labour shortage hasn’t gone away. In fact, the threat of free movement being removed following Brexit in January could make the skills shortage worse as around a third of construction firms in the UK currently have staff who were born outside of the UK.
While redundancies rose during the pandemic, resulting in the lowest numbers of people employed in the construction industry since 2013, the decline in current jobs has now started to slow. The third quarter of 2020 up until the end of September saw construction job losses hit 2.2% compared to the previous quarter, which saw a 4% loss rate.
As work is beginning again across many job sites, it is expected that more positions will come available, with data collected by the Office for National Statistics finding that there was an increase in vacancies for the fourth month running at the end of October. As of this period, vacancies stand at the same level as they did during the first quarter of 2020.
This signals that the construction industry may be recovering from the effects of Covid, however, the skills shortage that existed before the pandemic hasn’t gone away. In fact, it could be slightly worse due to the delay that many courses have suffered, meaning that there will be fewer trained individuals ready to enter the workforce.
All of this means that competition between firms to attract workers with key skills could be more fierce. Smaller companies could struggle, as the financial strain caused by Covid-19 may mean they are unable to offer wages at the same level as larger firms.
Domestic Reverse VAT Charge
The Domestic Reverse VAT Charge (DRC) for building and construction services was due to come into legislation in October 2020, however, it has since been delayed to March 2021 as a result of Covid-19. Firms will now need to ensure they have everything in order to adhere to the DRC once it comes into effect.
Most building and construction services that are supplied under the Construction Industry Scheme (CIS) will be subject to the DRC, meaning they will be required to pay VAT straight to HMRC rather than paying it to their supplier.
While the majority of services will be affected by DRC, there is a process for checking whether the scheme applies. Essentially, it means that the contractor directly beneath the client in a contracting change needs to inform any sub-contractors that DRC will apply to the services it receives. This should be reflected in invoices, which should b issued as “net”, with the VAT being accounted for and then paid by the contractor to HMRC.
Companies need to check whether these changes apply to them, especially if they have historically used their VAT cycle for cashflow purposes. If contractors are going to be affected by the DRC introduction, they will need a clear understanding of how cashflow will be affected, to ensure that any accounting systems and software they have can deal with the charge and make sure that staff who deal with VAT accounting understand what the reverse charge is and how it works.
Although many workers within the construction industry have seen jobs dry up during the pandemic, the government allowing firms to continue working during the lockdown in England kept many employed. However, it also means that backlog of work that was providing full-time employment for many people throughout the summer months is now starting to decline.
Unfortunately, many constructors sectors have been slow to start up again, with the financial insecurity caused by the Covid-19 pandemic meaning that fewer jobs are being put out to tender. This means that the next few months are likely to be tough for those looking to add to their backlog of work.
Although growth in the construction industry as a whole has started to see some positive results, a number of sectors are seeing a continued decline in activity. Civil engineering saw its third consecutive shrinking month in October while commercial office building also saw a fall.
October also saw a decline in the value of contracts being awarded, with just £3.8 billion worth of work being handed out, representing a fall of £600 million in September. The biggest spending client of the month was Oxford University, with a contract to build its new life and mind building. The private housing sector received the most awarded work, with around 17% of all new work awarded in the month going to this sector.
With economic uncertainty continuing and many people being worried about how sustainable the recent apparent recovery is, it looks as though shrinking backlogs could be a big challenge an increasing number of firms need to overcome.
April 2021 will see changes to IR35 legislation come into effect. These changes have been well-publicised but still represent a challenge for those in the construction industry. The IR35 legislation is in place to ensure that contractors pay the same tax and national insurance contributions as an employee performing an equivalent role would.
From April 6th, it will be the responsibility of medium and large companies to determine the employment status of contractors and Personal Service Companies (PSCs). Essentially, companies must determine if these workers are ‘inside’ or ‘outside’ IR35.
This change means that contractors and PSCs are no longer responsible for performing this assessment or for the potential tax/National Insurance contributions liability. It will also bring the private sector IR35 in line with the public sector, which had the same reform implemented back in 2017.
In order to adjust to the changes in legislation, firms will need to review their contractors, PSCs and wider supply chains to ensure they fully understand what they need to do and what potential liabilities there are if they are non-compliant after April 6th.
One of the biggest challenges that no one can ignore is the impact that Brexit will have on the UK’s construction industry once the country leaves the EU in January. Currently, details of a trade agreement have not been confirmed, so we don’t know exactly what could happen. However, there are likely to be some issues when it comes to labour, materials and infrastructure.
We’ve already touched on the fact that an end to free movement could have an effect on the availability of workers. The skills shortage is likely to get worse in this case, resulting in higher project costs with labour outstripping supply. This could mean that delivery timeframes become longer and that housebuilders struggle to hit government housing targets.
In terms of materials supply, leaving the EU could also affect the import and export of construction materials as free movement of goods will come to an end. In 2010, a study by the Department for Business Skills and Innovation found that around 64% of building materials were imported from the EU with 63% being exported to the EU. Following Brexit, those importing materials may find that quantities are limited or duties are increased, leading to a shortage of required materials.
Once the UK is no longer a member of the EU, it will lose access to the European Investment Bank (EIB) and the European Investment Fund (EIF). These institutions have historically invested large amounts in both major infrastructure projects and SMEs, which means that the loss of this funding following Brexit could cause issues with the delivery of large infrastructure projects and start-ups in the UK.
All of these Brexit challenges will only add to the issues caused by Covid-19, as well as general industry challenges. It is likely that 2021 is going to be a difficult year for the construction sector, but it is hoped that recovery continues over the next few months.