The biggest challenges facing the construction industry in 2021

From the introduction of the VAT reverse charge to Brexit and the focus on sustainability, we are set to see even more change in the construction industry this year.

Here, we've taken a look at some of the biggest changes and themes within the construction industry in the next 12 months and how they might affect your business.

Skills shortage:
Before the COVID-19 pandemic, the construction industry was facing a skills shortage. Looking at construction output in the UK over the past 12 months, all construction work fell by 12.5% compared with 2019. This was the largest decline in annual growth since 2009 where output fell 13.2%(1). This decrease hints that the issue of labour shortage is set to continue into 2021.

In November of last year, data from the Office of National Statistics (ONS) revealed that redundancies during the pandemic had resulted in the lowest number of people employed in the construction sector since 2013(2). However, with work now beginning again across many sites, it's anticipated that more positions will become available.

The pause in training and completed projects in 2020 could mean that the skills shortage has worsened, with fewer trained individuals ready to enter the workforce. But businesses should be encouraged to think about the future and the role they can play in upskilling new workers in the industry.

The government has recently announced a number of new grants and support measures which aim at supporting businesses to employ new workers including apprentices. For many construction firms looking to grow their workforce in light of an anticipated pick up in work, making use of these new and improved schemes and grants could be a good way to strengthen their teams in 2021. Firms should speak to their accountants about the schemes and how they can take advantage.

VAT reverse charge:
HMRC's new VAT domestic reverse charge for building and construction services came into effect on the 1 of March 2021.

The reverse charge applies to all CIS registered businesses buying and selling construction services that are subject to CIS reporting, apart from those that are zero-rated, up to the point in the supply chain where the customer is the end-user. At this point, the normal reporting and collection of VAT resume.

Where the reverse charge applies, rather than the supplier charging and accounting for the VAT, the recipient of those supplies accounts for the VAT. In practice, this will mean that where there is a chain of contractors/subcontractors working on a building project, for example, none of those entities will add VAT to their invoices, other than the main contractor who is invoicing the end-user of the property.

One of the biggest challenges for businesses in the sector is cash flow and a recent survey revealed that 1 in 5(3) construction companies say cash flow is a constant problem, with 84%(4) of construction companies reporting that they had problems with cash flow. With the new VAT domestic reverse charge from 1 of March 2021, we predict this could have a negative impact on the already stretched cash flow issues in the construction industry. It's important for firms to review their existing work pipelines and relationships in light of the change.

For more information on the VAT reverse charge, visit our dedicated page.

Shrinking backlog of work:
Although many firms may have had their jobs halted over the past 12 months, the government allowing some work to continue during the lockdown kept many construction workers in employment. But the implications of this now are that the backlog of work providing full-time employment for many in the summer months is starting to decline.

Some construction sectors, including civil engineering and commercial office building, have been slow to start up in 2021 with restrictions continuing. And with the financial insecurity caused by the pandemic, there are fewer projects going 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.

IR35:
The changes to the IR35 legislation come into effect on the 6 of April 2021. From this date, medium and large companies will be responsible for determining the employment status of any contractor and personal service companies (PSC). Essentially meaning that companies must determine if these workers are 'inside' or 'outside' IR35.

This change means contractors and PSCs are no longer responsible for performing this assessment or for the potential tax or National Insurance contributions liability. The change to the legislation will bring the private sector IR35 in line with the public sector, which saw the same reform in 2017.

In light of the upcoming change, we recommend undertaking a review of your contractors and PSCs, as well as your wider supply chain to ensure you are fully aware of your obligations and any liabilities in the event of non-compliance.

Brexit:
One of the biggest challenges businesses will face in 2021 is Brexit. We've already touched on how Brexit could worsen the skills shortage in the industry. The end to the right to free movement and the introduction of a points-based immigration system could put an end to construction firms employing workers from the UK. Many predict these changes will drive up the cost of labour by as much as 10%.

On top of this, Brexit could mean supply issues with construction materials. The EU/UK post-Brexit trade agreement, which came into effect on the 1 of January 2021, introduced measures to ease restrictions on the flow of goods between the EU and the UK. However, increased customs checks, assessments, duties, and restrictions on products from outside the UK and EU could cause delays, shortages, and an increase in costs.

The Builders Merchants Federation (BMF) has already warned that congestion at UK ports is affecting the availability of construction materials. It has also been reported that material prices are up 20% on certain products.

Now that the UK is no longer a member of the EU, it has lost access to the European Investment Bank (EIB) and the European Investment Fund (EIF). Historically, these institutions have invested large amounts in major infrastructure projects and SMEs. This loss of funding could cause issues with the delivery of large infrastructure projects and start-ups in the UK.

If your business moves goods between the UK and countries in the EU, you'll need to follow new customs and tax rules due to Brexit. We understand this means a lot of changes, and HMRC can help you navigate with the SME Brexit Support Fund. Firms should contact their accountants or HMRC directly to learn more about the available support.

Technology:
According to JLL's State of Construction Tech report, the coronavirus pandemic had a big impact on accelerating tech adoption in the construction industry in 2020.

Now that the government has released a plan to ease lockdown restrictions, the construction industry is set to see greater demand. In 2021, it's anticipated that technology will continue to see greater adoption as construction leaders deal with improving productivity, eliminating inefficiencies, and adapting to a younger workforce.

Key technology which is set to be big in the construction industry in 2021 includes:

  1. Collaborative software solutions: Allowing easy communication in real-time between the office and the field.
  2. Building Information Modelling (BIM): A process incorporating digital representations of the physical and functional aspects of a building that can lead to better collaboration during design and construction on projects.
  3. Artificial intelligence: AI is being used to monitor workers and identify safety hazards or missing PPE and immediately alert the worker and safety manager via their smartphone or a wearable device to correct the hazard before an accident occurs.
  4. Virtual reality: Safety training, equipment operator training, and building systems installation training are all areas where virtual reality is helping business owners train and develop the next generation of construction workers.
  5. Wearables: Wearable tech is being embedded into apparel and PPE already common on construction sites like hard hats, gloves, safety vests, and work boots.

Sustainability:
A critical issue that the construction industry has been facing in recent years is adopting sustainable practices. This challenge comes with many areas for consideration including, the cost of changing ways of working to be more sustainable.

The World Green Building Trends 2018 Smart Market Report revealed that almost 40% of UK firms reported affordability as the biggest challenge posed by adopting sustainable construction practices, and almost 50% stated that they expected green buildings to incur higher first costs.

However, construction firms can also see cost savings by implementing sustainable methods such as reducing waste and increasing energy efficiency. Other benefits of sustainable building products are the increased demand for them in the market.

Consumers are faced with a climate emergency and want to take personal responsibility for who supplies them with their buildings and building facilities. According to the report above, 34% of UK firms reported that they are facing increased demand for greener buildings.

In order for businesses to upgrade their tools or move to a more sustainable way of working they'll need to think about cash flow and how much they can afford to invest. We would suggest working with your accountants to form a realistic time plan and look at work funding or grants that may be available to support these changes.

To encourage capital expenditure and business growth, the government recently unveiled a new 'Super Deduction' tax relief. The idea is that companies will be able to claim a deduction from their tax bill if they invest in new plant and machinery for their business, which could help construction firms move towards a more sustainable way of working. Under the super deduction, you are allowed a capital allowance of 130% on your qualifying plant and machinery investments. We've developed a full guide to this new measure which you can see here.

If you want further information about how these changes will impact you and your business, please get in touch.

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