It was announced in 2018 that in order to reduce the scope for VAT fraud in the construction industry from October 2019, UK customers who get supplies of construction services must account for the VAT due on these supplies on their VAT return rather than the UK supplier. This is referred to as the Reverse VAT Charge. This decision has now been delayed for 12 months to start in October 2020.
HMRC have stated that 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 had announced it plans to introduce a domestic ‘Reverse VAT 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.
Many businesses needed to adapt their accounting systems for dealing with VAT and prepare for a negative impact on the cash-flows, as they will no longer get VAT payments from customers for services where the reverse charge applies.
Many construction business had raised concerns that they were not ready to implement the changes and were also concerned about the timing with a possible Brexit impact also impacting the sector.
In response the government has delayed the introduction of the reverse charge for a period of 12 months until 1 October 2020. This will also avoid the changes coinciding with Brexit.
HRMC have been clear that they recognise some businesses will have already changed their invoices to be ready in October for the implementation of the reverse charge and cannot easily change them back in time. In these situations, where genuine errors have occurred, HMRC will take into account the fact that the implementation date has changed.
If businesses have already opted for monthly VAT returns ahead of the 1 October 2019 implementation date this can be reversed by using the appropriate stagger option on the HMRC website.
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