A sudden increase in your VAT bill is usually caused by higher turnover, timing differences, missing reclaimable VAT, or changes in how income and costs are treated. In construction, irregular invoicing, CIS interactions, and poor reporting can hide the issue until it hits your bank account.
If you’ve ever opened your VAT return and thought “That can’t be right”, you’re not alone. We see this every month with UK construction businesses — often profitable on paper, but caught off guard by VAT draining cash unexpectedly.
Let’s break down why this happens, what it means for your business, and how to stop VAT from becoming a recurring cashflow shock.
What Does a “Sudden VAT Increase” Actually Mean?
A VAT bill doesn’t usually jump randomly. It’s a lagging indicator — the result of decisions, systems, and timing from weeks or months earlier.
In construction, VAT bills spike when:
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Sales rise faster than costs
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Invoicing is delayed or bunched into one quarter
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VAT on costs isn’t fully reclaimed
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Zero-rated vs standard-rated work isn’t tracked properly
VAT isn’t a tax on profit — it’s a tax on activity.
That distinction matters more in construction than almost any other sector.
Why Is This So Common in Construction Businesses?
Construction has unique VAT pressure points:
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Lumpy invoicing (stage payments, valuations)
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CIS deductions masking real cash position
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Subcontractor-heavy cost bases
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Multiple VAT rates across labour, materials, and projects
Without tight financial controls, VAT becomes something you react to, rather than plan for.
The 7 Most Common Reasons a Construction VAT Bill Jumps
1. Turnover Has Increased (But Cash Hasn’t)
This is the most common and most misunderstood reason.
Example:
You invoice £300,000 + VAT in a quarter.
Your VAT liability on sales alone is £60,000.
If clients haven’t paid yet, HMRC still wants the VAT.
📌 Key insight:
Growth without VAT planning destroys cashflow, even in profitable construction businesses.
2. Invoicing Has Been Delayed or Bunched Together
We often see:
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Months of under-invoicing
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Followed by a big “catch-up” valuation
This pushes VAT into one reporting period, inflating the bill.
Result:
A VAT spike that looks sudden, but was building quietly.
3. You’re Not Reclaiming All the VAT You’re Entitled To
Common missed VAT in construction includes:
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Materials bought personally and expensed incorrectly
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Supplier invoices not captured on time
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Mixed-use costs incorrectly coded
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Plant hire VAT missed due to poor document control
A £5,000/month reclaim gap becomes £15,000 per quarter.
4. CIS Is Distorting Your Cashflow Picture
CIS deductions reduce cash received — but not VAT owed.
Many directors subconsciously assume:
“HMRC already has money from CIS, so VAT won’t be bad.”
Unfortunately, CIS and VAT are completely separate systems.
This misunderstanding alone causes serious cashflow stress.
5. Zero-Rated vs Standard-Rated Work Is Misunderstood
New builds, conversions, repairs, labour-only contracts — VAT treatment varies.
We regularly uncover:
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Zero-rated work invoiced incorrectly
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VAT charged unnecessarily (hurting competitiveness)
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Or VAT undercharged (creating future HMRC risk)
Incorrect VAT treatment doesn’t just affect tax — it distorts margins.
6. You’ve Come Off the Flat Rate Scheme
Leaving the Flat Rate Scheme often causes a sharp VAT increase because:
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You start paying VAT on actual sales
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Margins tighten instantly if pricing isn’t adjusted
Without proactive planning, this feels like an overnight hit.
7. Your Reports Don’t Show “VAT Exposure” Clearly
Most construction businesses look at:
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Bank balance
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Profit & loss
But VAT exposure often isn’t visible anywhere.
At Thomas Emlyn Ltd, we treat VAT like a cashflow commitment, not an admin task.
Real Construction Example (Anonymised)
A subcontractor business we worked with:
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Turnover: £2.4m
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Reported profit: £210k
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VAT bill spike: £48k
Issues identified:
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Delayed invoicing
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£12k missed VAT reclaims
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CIS masking true cash position
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No VAT forecasting
After restructuring:
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Monthly VAT forecasting
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Cleaner invoicing cycle
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Better cost capture
📊 Result:
VAT surprises eliminated within 2 quarters
Cash buffer increased by £75k
Margins became predictable
How Do You Prevent VAT From Becoming a Cashflow Shock?
1. Forecast VAT Monthly — Not Quarterly
You should always know:
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VAT due if the quarter ended today
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VAT owed vs VAT cash actually received
This is core to effective construction cashflow management.
2. Separate “VAT Money” Mentally and Practically
VAT is not your money.
Strong businesses:
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Ringfence VAT
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Track VAT liability weekly
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Avoid spending VAT unintentionally
3. Align Invoicing With Cashflow Strategy
Valuations and invoicing should support:
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Cash stability
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Predictable VAT
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Margin protection
Not just project completion.
4. Get Strategic Support — Not Just Compliance
This is where many accountants fall short.
At Thomas Emlyn Ltd, our Virtual Finance Office (VFO) and Virtual Finance Director (VFD) services exist to:
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Anticipate VAT issues
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Improve profit margins in construction
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Turn numbers into decisions
Why Thomas Emlyn Ltd Takes a Different Approach
We specialise in UK construction businesses — not generic SMEs.
Our team regularly contributes to:
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Construction finance discussions
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Industry podcasts and peer groups
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Advisory partnerships across tax, finance, and growth
We don’t just file VAT returns.
We design systems that stop VAT from damaging your cashflow.
Frequently Asked Questions (FAQs)
Why is my VAT bill higher even though profits haven’t increased?
Because VAT is based on sales and timing, not profit. If invoicing increases or costs fall, VAT rises even if profit stays flat.
Can VAT cause cashflow problems in profitable construction companies?
Yes — frequently. We see profitable businesses fail cashflow-wise due to poor VAT planning.
Should I stay on the Flat Rate Scheme as a construction business?
Often no — but it depends on margins, cost structure, and growth plans. This should be reviewed annually, not assumed.
How often should I review VAT during the year?
At least monthly. Quarterly reviews are reactive and too late for cashflow decisions.
Can a Virtual Finance Office help with VAT planning?
Absolutely. A proper VFO ensures VAT forecasting, cashflow visibility, and proactive decision-making — not surprises.
What to Monitor Next (Testing & Improvement)
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If Your VAT Bill Keeps Surprising You…
It’s not bad luck.
It’s a system problem — and systems can be fixed.
If you want clarity, predictability, and stronger margins, Thomas Emlyn Ltd can help. Book a discovery call here.
Thomas Emlyn Ltd
Stronger Margins – Healthier Cashflow – Sustainable Growth
#construction #profit #growth #elevate
