More than 150,000 construction companies are facing a 20% drop in cash flow when planned VAT changes come into force in October.

The “domestic reverse charge” changes mean companies in the construction supply chain will no longer receive their 20% VAT payment when they submit bills.

The VAT cash will instead be paid direct to HMRC by the customer receiving the service who will reclaim it in the normal way.

Accounting giant RSM has now joined the chorus of opposition to the scheme.

Ian Carpenter, partner at RSM, said: “This new measure will have a profound impact on a construction business’s invoicing routine.

“Further, it will have a serious cashflow impact, most likely in the early stages of the supply chain, where contractors will no longer charge and collect VAT from their customers.

“This VAT cash can sometimes be used by businesses to fund working capital, before it’s paid over to HMRC via its VAT return.

“Whilst this measure is being brought in by HMRC to fight fraud, the rules apply to all in the industry. Failure to comply will risk delayed payments by customers and penalties from HMRC.

“Businesses should be reviewing their supply chain now to get reading for the changes which are less than two months away.

“Better still, we would urge Government to consider delaying the implementation date to allow the sector a chance to properly prepare.”