The Government has announced new measures aimed at tackling rogue traders in the home improvement sector, including the launch of a new Trusted Payments app for builders, tradespeople and their customers.
The announcement forms part of a wider crackdown on so called “cowboy builders”, with the Government looking to give homeowners greater protection when paying for building and home improvement work while helping reputable tradespeople demonstrate that they operate to higher standards.
The Trusted Payments app is expected to go live next week, alongside plans for a new Approved Code for the home improvement sector.
So, what has actually been announced and what do we know about the new system so far?
What is the Trusted Payments app?
Trusted Payments is a new app based payment service designed to provide greater protection when customers pay for home improvement work.
Rather than customers paying large amounts directly to a tradesperson upfront, money can be held safely and then released to the builder in stages as agreed milestones within the project are reached.
The Government has compared the protection offered by the system to the way tenant deposit protection schemes safeguard money.
The intention is to provide greater protection for customers while still ensuring legitimate builders and tradespeople are paid as work progresses.
When will Trusted Payments launch?
The Government has confirmed that the Trusted Payments app is due to go live next week.
The initial announcement states that more than 100,000 traders will be able to access the service before the end of September.
As the service begins to roll out, we should get a much clearer picture of exactly how builders will register, how customers will make payments and how money will be released throughout a project.
What is the new Approved Code?
Trusted Payments isn’t the only change being introduced.
The Government has also announced a new Approved Code for businesses operating within the home improvement sector.
Businesses that sign up will be expected to demonstrate higher standards in areas including customer service, transparency and dispute resolution.
The intention is to make it easier for homeowners to identify reputable businesses when choosing someone to carry out work on their property.
The first businesses are expected to join the scheme by the end of September, with the Government stating that the scheme will be fully implemented by December.
Will builders have to use Trusted Payments?
Based on the information released so far, the Trusted Payments system is not being introduced as a compulsory payment method for every construction business.
Similarly, participation in the Approved Code is expected to be voluntary.
The Government’s aim appears to be to give reputable businesses a way of providing customers with additional reassurance when agreeing to building or home improvement work.
The interesting question will be whether customers begin actively looking for builders who use these schemes.
If Trusted Payments becomes widely recognised by homeowners, offering protected payments could potentially become another way for legitimate construction businesses to differentiate themselves from less reputable operators.
How will payments work?
This is one of the most interesting parts of the announcement for construction businesses.
Rather than simply paying a builder a large amount upfront, Trusted Payments will allow money to be released throughout the project and linked to key milestones.
This could potentially work well for both sides.
Customers receive greater protection because they are not handing over significant amounts of money without safeguards.
Builders can still receive payments throughout a project rather than waiting until the entire job has been completed.
However, the exact structure of those payment stages will be important.
Construction businesses regularly incur significant costs before or during a project, particularly when purchasing materials, hiring equipment and paying employees or subcontractors.
Any payment schedule therefore needs to provide sufficient cash throughout the job to cover those costs.
What could this mean for builders?
At this stage, it is too early to know how widely Trusted Payments will be adopted.
For reputable construction businesses, however, the concept could have some advantages.
One of the biggest concerns homeowners have when appointing an unfamiliar builder is paying a large deposit and worrying about what happens to their money if something goes wrong.
Being able to offer a protected payment method could help provide customers with additional confidence.
There could also be benefits to having clearly defined payment stages agreed before a project begins.
From the builder’s perspective, however, cash flow will remain extremely important.
A construction project can be profitable overall while still causing financial problems if the business has to fund large material and labour costs before receiving the corresponding payment from the customer.
Builders considering using the new system will therefore need to understand exactly when money becomes available to them.
What don’t we know yet?
Although the Government has confirmed the launch of Trusted Payments and explained the basic principle behind it, there are still practical details that will become clearer as the service launches.
For construction businesses, some of the important questions will include:
• How builders register to use the service
• Whether there are any fees for businesses or customers
• Exactly how money is held before being released
• How project milestones are agreed and approved
• What happens if the builder and customer disagree about whether a milestone has been completed
• How deposits and upfront material purchases are handled
• How quickly money is released to the construction business
• What documentation and transaction records the app provides
These details will determine how useful the system is in practice for both homeowners and construction businesses.
What about VAT and accounting?
There is also an accounting and VAT question that will become clearer once the full operation of the Trusted Payments system is known.
Based on the information currently available, we would expect the normal VAT rules to continue to apply rather than Trusted Payments creating a separate VAT treatment.
For businesses using the standard VAT accounting method, VAT would generally continue to be determined under the normal tax point rules. This means that the fact money may be held within the Trusted Payments system does not necessarily mean VAT only becomes due when those funds are eventually released to the builder.
For businesses using the VAT Cash Accounting Scheme, we would expect the position to continue to be based around when payment is treated as received. An important point requiring further clarification will therefore be exactly when a payment held through Trusted Payments is regarded as received by the construction business for VAT purposes.
The same applies where deposits and staged payments are involved, as these can already have their own VAT implications under the existing rules.
At this stage, there is nothing in the announcement to suggest that the introduction of Trusted Payments will change the underlying VAT rules. However, until the full mechanics and terms of the payment service are available, businesses should be cautious about assuming exactly when payments passing through the platform will create a VAT tax point.
We will be watching this closely as further details of the service are released.
Our view
For reputable construction businesses, measures that make it easier for customers to distinguish professional tradespeople from rogue operators could ultimately be positive for the industry.
The principle behind Trusted Payments also makes sense. Customers understandably want protection when committing significant sums of money to a building project, while builders need confidence that they will be paid for the work they complete.
The real test will be how the system works in practice.
In particular, builders will need to understand how quickly payments are released and whether the milestone structure works alongside the significant upfront and ongoing costs involved in many construction projects.
With the app due to launch shortly, we expect considerably more information to become available over the coming weeks.
At JTR Accountancy, we will continue to follow the rollout and provide further updates where there are accounting, VAT or cash flow implications for construction businesses.
Reach out for assistance
If you run a construction business and are looking for an accountant who understands the industry, JTR Accountancy specialises in supporting builders, contractors and tradespeople across the UK.
If you’d like to discuss how we could support your business please get in touch with our team.