Cowboys builders set to return as VAT rises

CHANCELLOR George Osborne's 2.5 percentage point VAT rise will trigger a resurgence of the "cowboy builder", construction experts are warning, as the industry faces another "depressing" 12 months.

Industry bodies fear the tax increase will encourage hard-pressed households to pay cash in hand to "white van men" rather than choosing legitimate businesses which will be forced to charge at least 20 per cent more.

The sector is bracing itself for a slew of business failures at the bottom end of the market as competition for contracts, both domestic and commercial, is fiercer than ever. There are fears that the construction industry is hurtling towards a second crisis as confidence among firms has returned to lows not seen since the grips of the recession.

Stuart Brodie, head of tax at Grant Thornton in Scotland, said not only would the VAT increase fuel the black market but past trends showed it would also reduce the government's tax take.

"You generally see that if you cut the tax rate, you up the tax intake as it's less attractive for businesses to avoid it and vice versa," Brodie said.

Brodie added that the VAT rise would act as a disincentive for many legitimate builders at the lower end of the market to grow their businesses as it would be more cost effective for them to do less work and keep turnover below the 68,000 VAT registration threshold. "You are putting an automatic collar on their ability to grow their business," he said.

Michael Levack, head of the Scottish Building Federation, warned a boom in the black market would also cause problems for the consumer after years of efforts to clean up the industry. "If you are willing to take cash in hand it probably means you don't have the right insurance," he said.

Levack warned that the outlook for industry was as "depressing" as ever as the public sector, which is currently sustaining the industry north of the Border, prepares to take an axe to spending. The public sector currently accounts for 80 per cent of construction sector spend in Scotland due to a lack of private contracts.

Levack said the main victims would be small contractors and regional businesses as bigger firms compete for less valuable contracts they wouldn't normally touch.

"Competition is absolutely fierce out there and the procurement process appears to work against SMEs. Regional contractors are getting squeezed and we'll see more failures."

Although the number of administrations so far in the sector have been lower than expected, Levack warned: "There is a dam that is ready to burst."

Andy Mallice, managing director for Rok in Scotland, said the pipeline of work for next year was 21 per cent down on normal levels. "The margins at which we are looking at winning work are very tight - circa 1 per cent," he added.