Construction industry ‘Reverse Charge’ for VAT

Construction industry ‘Reverse Charge’ for VAT

What is the Construction industry ‘Reverse Charge’ for VAT?
In 2017 the government consulted on reducing tax fraud in the construction industry. The main outcome of this was that in the Autumn budget 2017 the Government announced its intention to bring forwards legislation to counteract fraud in labour supply chains. Organised criminal gangs create contrived supply chains to enable them to perpetrate what is commonly referred to as ‘Missing Trader’ fraud whilst operating alongside actual construction services. HMRC estimate an average of £100m a year is lost due to this type of fraud.


How does fraud in the labour supply market work?
This type of fraud is most commonly found in construction among sub-contractors who provide groups of workers to the construction sector. They have low VAT costs to recover, because their main cost is wages, which are not subject to VAT. However, they are required to charge VAT on the service of supplying their workers to other contractors. Some sub-contractors will attempt to evade the high net VAT payable by going missing or committing other forms of fraud. With income tax, there is a failure to make the appropriate Construction Industry Scheme (CIS) deductions and remissions to HMRC which are supposed to cover workers’ PAYE contributions.


To counter this VAT fraud, the government has announced it plans to introduce a domestic ‘Reverse Charge’. This means that the customer in the transaction becomes responsible for accounting for the VAT. This system is already in place in many EU countries and proves effective as if the sub-contractor does not receive the VAT, they cannot effectively steal it.


What happens next?
• The industry is awaiting the publication of draft legislation by HMRC as part of a technical consultation in spring 2018.
• The finalised legislation will be published along with guidance by end September 2018 to come into force in October 2019.
• The industry will need to ensure that systems to operate under the new rules will need to be in place for October 2019. Until the draft legislation is released, no further details are available, but it is anticipated that sales to the final business or domestic customer are out of scope of the VAT reverse charge. This is intended to reduce the complexity for developers without reducing the measure’s effectiveness.

HMRC have also clarified that there will be no threshold level to avoid offering fraudsters a means to avoid the measure.


How does supply chain labour fraud lead to Modern Slavery investigations?
Companies should also consider that any investigation into the supply chain for VAT could also raise concerns around Modern Slavery and it is advisable to ensure that correct due diligence has been carried out to ensure no forced labour has entered the supply chain. If you are unaware of the requirements of modern slavery and the need for Due diligence please read our guide to Modern Slavery.


Who should I speak to if I have concerns or questions around the Construction industry ‘Reverse Charge’ for VAT?
Altion Law are experts in dealing with disputes and related matters involving HMRC. Where matters cannot be resolved directly with HMRC, Altion Law has the extensive knowledge and proven track record in both Tax Tribunals and Court Proceedings to guide you through to the successful conclusion of your matter. If you are concerned about VAT in your supply chain or Modern Slavery, please call one of our specialists today.

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