The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Well-known contractors yesterday warned of a “brutal” impact if they were forced to absorb Value-Added Tax (VAT) on pre-existing contracts, and said the new levy could create a “huge black market” in construction services.

Stephen Wrinkle, the Bahamian Contractors Association’s (BCA) immediate past president, said the combination of VAT and no regulatory regime would “change the face of the construction industry” in the Bahamas.

Rather than hire a quality contractor with a physical office presence, Mr Wrinkle suggested that clients would opt to work without a contract and operate as their own project manager by hiring a team of sub-contractors - all in a bid to avoid 7.5 per cent VAT on the contract price.

The Government’s failure to-date to bring the Contractor’s Bill, and its proposed licensing and regulatory regime, to Parliament would allow such practices to flourish with impunity, Mr Wrinkle argued.

If his prediction comes true, this will have major implications for not just the Government’s VAT revenues, but construction industry quality and consumer satisfaction.

Mr Wrinkle’s comments came as Robert Myers, the Tax Coalition’s co-chair, revealed that his construction businesses were facing the “serious reality” they would lose potential 2015 business due to VAT’s implementation.

With many clients unhappy about having to absorb the 7.5 per cent levy, Mr Myers said discussions with them had “created some challenges for us”.

He likened the situation to “that lump in your throat” when persons realise something bad, or unfortunate, is likely to happen over which they have no control.

Mr Wrinkle, meanwhile, suggested the Government’s proposal that businesses absorb the VAT payment on pre-existing contracts, if the client refuses to pay post-January, could be challenged in the courts.

The construction industry will be among the sectors hardest-hit if this provision stands and, asked about its likely impact, the former BCA president replied: “Brutal. It’s a death knell.

“We don’t make 7.5 per cent [profit margin] on construction contracts in this day and age. If you break even, you’re doing well. The construction industry is on its knees.

“The cost of doing business, and the productivity and the challenges that we have in collecting on contracts just leave us holding the bag, so to speak.

“There’s no lien laws, so there’s no process in place by which the contractor can collect their monies other than we have the court process, and that’s little to no result because of the time and money involved.”

Mr Wrinkle warned that the absence of a lawful regulatory regime for the construction industry, combined with VAT, would likely alter the sector beyond recognition.

“This VAT is going to change the face of the construction industry in the Bahamas,” he told Tribune Business. “People are no longer going to hire quality contractors.

“Clients will put a team together, and sub-contract everything out. No longer will they have a contract. Nobody is going to have a contract. Who are the Government going to collect from?”

Mr Wrinkle said building permits, inspections and occupancy certificates were easy enough to obtain, and added: “There’s nothing to license and regulate the industry.

“The consumer can save 7.5 per cent if a guy does it out of the back of a truck, with no registered office.”

And he warned: “It’s [VAT and no regulation] going to create a huge black market, bigger than it is already, and no one has consulted the BCA and industry on this. We have absolutely no indication of what’s going on, and we’re supposed to be an important sector.”

Mr Wrinkle suggested it would be “very difficult” to implement VAT properly by January 1 in the absence of proper construction industry regulation.

Disclosing that many contractors he had spoken to were “scaling right back”, he added: “It’s not worth doing the work. For the average contractor, you have all the exposure and risk, but none of the protections and benefits.

“You are going to see a tremendous decline in businesses in the Bahamas come January 1. Anyone who can close down or consolidate is doing so.”

Mr Wrinkle lamented what he described as the absence of legislation designed to promote economic growth, criticising the Government for its poor fiscal management and lack of accountability.

He is not alone in expressing concern for the construction industry’s future, at least in the short-term.

For Mr Myers told Tribune Business: “If we have a client building a $5 million home, they may pull out [because of VAT. It’s entirely possible.”

At 7.5 per cent, VAT would add $375,000 to the cost of constructing such a home, and Mr Myers reiterated: “It’s a serious reality.

“We may lose jobs because of VAT. We’re having serious discussions with clients now that are considering not building because of the 7.5 per cent increase.

“It’s a big cost increase. You’re talking about a big change. We’re concerned.”

Mr Myers said it was impossible to predict VAT’s impact on construction business volumes, but added that many persons still had questions despite the passage of the legislation and regulations, and publication of guidance notes.

Adjustments to the Tariff Schedule had also reduced duty rates on some construction materials, and Mr Myers said his businesses would seek to further mitigate VAT’s impact via efficiency gains.

Yet he also expressed concern about a drop in demand for his landscaping maintenance and pool services businesses, once customers saw the 7.5 per cent cost increase in their January/February 2015 bills.

“We’re having discussions with some of our larger customers, but they’re not easy, and they are not all that happy. It’s creating some challenges for us. We’re hoping to hold on to as much business as we can,” Mr Myers told Tribune Business.