‘Reverse Charge’ for VAT?
In 2017 the government consulted on reducing tax fraud in the construction industry. The new ‘reverse charge’ for VAT was the main outcome of this. 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. This was to enable them to perpetrate what is commonly referred to as ‘Missing Trader’ fraud. This was 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. Amongst 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. They do this 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. These 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.
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. 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.
How can we help you, with 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 HMR Altion Law can assist. We have the extensive knowledge and proven track record in both Tax Tribunals and Court Proceedings. We will be able 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.
Altion Law are specialists at advising and representing parties with Construction matters. If you would like to have a confidential discussion with a member of our team, please complete our Contact Us Form, and we will call you back at a time that is suitable for you or you can contact us directly on 01908 414990.