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Last updateWed, 03 Mar 2021 10am

Construction SMEs have the foundations to build on in 2021

By Andrew Dixon, Commercial director specialist finance, Aldermore.

2020 was a highly challenging year for SMEs in construction and across sectors, with the Covid-19 pandemic putting the brakes on economic activity, causing significant supply chain disruption, and hitting business confidence.

But now as 2021 gets underway, the medium-term prospects look brighter even if a new national lockdown has recently been announced. The vaccination rollout provides hope that the pandemic will be brought under control. One last push through to the Spring may see the country finally turning the corner. Construction in any case is one industry that will be able to carry on working as normal to keep the economy moving.

Construction beginning to look forward

In truth, construction has been one of the sectors least affected by the outbreak given that sites only had to close for a limited time in the early stages of the first lockdown last year. Although extra measures (and costs) had to be incurred to ensure that sites could operate in a Covid-safe manner, construction firms were fortunate compared to their counterparts in areas such as hospitality and transport where the ramifications of the virus have been much longer-lasting and more drastic.

We saw evidence of greater positivity in UK Finance’s most recent SME Finance Monitor*, covering Q3 of 2020. Conducted prior to the emergence of the new virus variant and the latest lockdown, only 34% of construction respondents felt that ‘the worst is yet to come’, significantly down on Q2 when 63% felt that way. The proportion was much lower than in other sectors such as transport (48%) and retail (44%). Nearly half of construction decision makers (47%) described their overall mood now as positive, well up on just 19% in Q2 and only bettered by two other sectors, agriculture (56%) and business services (48%).

Along with business services firms, construction SMEs were also the most likely to say they were ‘planning for the future’, with only 17% of building firms saying they were still focused simply on dealing with the crisis.

In short, the data reveals growing signs of the construction sector beginning to look ahead and anticipate something much more akin to business as usual. The new lockdown is a setback in general terms for communities and the wider economy, but it should have only a limited effect on construction firms. Our own experience is that our clients’ activity has largely recovered with turnovers returning towards where they were when the pandemic began. Businesses have used the various government support schemes to protect their position while their activities were severely curtailed. These have helped them get through this difficult period and the subsequent return of trading.

The SME Finance Monitor also showed that over four in ten construction firms (42%) utilised external finance in Q3, a significant increase on Q2 (28%) which indicates a greater confidence in itself. And indeed, the proportion of firms who said they were concerned about their ability to repay finance fell significantly too, from 39% in Q2 to less than one in five (17%) in Q3.

With housebuilding an ongoing national priority – underpinned and supported by schemes such as Help to Buy and the stamp duty holiday on properties up to £500,000 which continue to stimulate buyer demand – and with national infrastructure projects such as HS2 also front and centre in the government’s strategy of ‘building back better’, the prospects for construction certainly look solid. 

Challenges ahead, Brexit still holding some unknowns

However, as we all know, life is rarely straightforward. There are some significant uncertainties and issues ahead. Firstly, construction activity is broadly linked to the wider health of the economy. The new lockdown will hit many other sectors hard and pose new challenges. At some point, government support schemes such as CBILS and furlough will need to be wound down, and when this happens the pressure will rise on many businesses. We could see recessionary forces gathering strength. Record redundancies (370,000) were made in the three months to October 2020 and the outlook remains uncertain**. This could feed through into lower demand for construction services if commercial projects falter.

Secondly, there is the historic watershed of Brexit to factor in. The UK has now become truly independent of the EU – and it was a huge boost and relief to businesses across sectors that a deal was agreed. The absence of any tariffs or quotas was a key win. Nevertheless, it will take some time for the new trading conditions to settle and it is quite possible that we will see some teething problems as everyone gets used to the new regime.

As with Covid-19, the construction sector is perhaps more shielded from the possible effects of Brexit than other sectors. Construction SMEs generally do all their work within the UK after all – projects overseas are the domain of the larger multi-national players. SMEs in other sectors who do higher levels of business with European companies or consumers are naturally likely to be more affected.

But that doesn’t mean there won’t be any impacts for construction firms. They could see some disruption to the supply of materials, particularly in the early days. Around £10bn of building materials are imported to the UK every year***. If there are delays at ports and transport bottlenecks, firms may get a shock if they haven’t planned ahead. The industry has experienced shortages of bricks and plasterboard at different times in recent years – Brexit could potentially create new ones for a time. In our own recent survey****, nearly a quarter of construction respondents (23%) said they expected to find more suppliers within the UK – it will be interesting to see whether this proportion grows and what the pattern is over time

Another important area – although it is probably more of a mid-term impact – is the availability of labour. Many workers in construction are from overseas and a points-based system to live and work is coming into effect. Those already resident in the UK have until 30 June to apply to remain. Construction firms need to analyse the possible impacts of this on their business carefully and support staff caught by the new regulations through the process. Our survey indicated less than one in ten (8%) had ensured that relevant employees had applied for the EU Settlement Scheme (a figure that was similarly low across all sectors).

On the horizon: VAT reverse charging, IR35

There are other important changes coming down the track early this year too. One of these is VAT ‘reverse charging’ that is due to come into effect in March. This means that VAT-registered businesses within a supply chain in the construction industry will no longer charge or receive VAT between themselves. While they will still record VAT, they won’t actually pay it over or receive it from each other. Only where services are to the ‘end user’ in a chain – likely to be the developer or main contractor – will VAT be charged and paid over to HMRC.

The cash flow implications could be significant. Many building firms and sub-contractors have become accustomed to receiving VAT, and indeed use it as a form of liquidity before they have to pay the monies owing to HMRC at the end of the quarter. This money will stop coming in from March, putting cash flow pressure on some in the sector especially in the first months while they adapt to the new system. There will also be a need to make adjustments to billing and accounting systems – it will be important to obtain advice from the company’s accountant or other financial adviser. This change will coincide with the deadline to pay any deferred VAT from the beginning of the pandemic. Evidently, if there are firms who have eaten into these funds for day-to-day financing purposes, paying this sum back could put further pressure on cash flow.

Another important development is the prospect of changes to ‘off-payroll working’ rules (IR35) that will take effect in April. Under this change – similar to rules that have already been introduced in the public sector – contractors whose main or whole work is for one employer will need to be treated as full-time staff subject to PAYE deductions. The impact of this for employers is mainly administrative – bringing affected contractors on-payroll. The much bigger impact is on the individuals themselves, as they will see a drop in their weekly or monthly income due to tax and NI being deducted at source. It will be important to liaise with these individuals and make sure they are aware of the changes coming.

Preparation is critical

Putting all of these factors together, it is clear that although the outlook is improving, there is plenty coming for construction firms to negotiate. Preparation is key. But how aware are leaders in construction SMEs?

James Duffill, from building consultancy Naismith’s commented: “Parts of the construction industry still appear to be ‘sleepwalking’ towards some of the changes that are now imminent. They certainly need to focus on what is coming and take the necessary professional advice. This is especially important given that we can expect to see something of a dip in work volumes in the early part of 2021 as the UK adjusts to the Brexit deal and as the economy adjusts to the inevitable eventual tapering off of governmental Covid-19 support. The contracts already in place should see most construction firms through – but there may be some wrinkles along the way. We also expect a rise in disputes between firms as to who bears the costs for the extra safety equipment and measures put in place for Covid-19. Indeed, we have seen some evidence of this already. There will be plenty for construction SMEs to think about as the year progresses.”

Construction is one of the cornerstones of the UK economy and has a key role to play in the post Covid-19 recovery. At Aldermore, we are committed to supporting the industry through good times and bad and have a range of finance solutions specifically developed for construction SMEs. We look forward to working closely with clients in the sector throughout this crucial recovery period and beyond. Construction firms have proven themselves to be resilient, determined and adaptable during the Covid-19 crisis and we have every confidence that this will continue through the year ahead.

You can contact the Aldermore construction finance team on 03339997577 or visit our website

*SME Finance monitor, an independent report by BVA BDRC, November 2020

** Office for National Statistics, Labour market overview, UK: December 2020

***Department for Business, Energy & Industrial Strategy Monthly statistics of Building Materials and components. Commentary, December 2020.  Coverage UK 

****Research conducted by Opinium Research between 23 October and 04 November 2020 with a nationally representative sample size of 1,003 senior decision makers in UK SMEs

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