Budget 2017: reverse charge to curb construction industry VAT fraud

The Chancellor included an early warning in the Budget of the government’s plans to tackle VAT fraud in the construction industry, by introducing a domestic ‘reverse charge’ VAT scheme for construction services

The measure shifts responsibility for paying the VAT along the supply chain to remove the opportunity for it to be stolen. The changes will have effect on and after 1 October 2019. The long lead-in time is intended to give businesses adequate time to prepare for the changes.

There will be a technical consultation on draft legislation in spring 2018, and a final draft of the legislation and guidance will be published by October 2018.

HMRC ran a consultation on the issues between March and June this year, highlighting growing problems with organised crime gangs setting up businesses with the intention of fraudulently failing to pay the VAT and making incorrect income tax deductions.  The two principle methods are taking over an existing company with gross payment status (GPS) and artificially lengthening the supply chain in order to make reconciliations complex, or starting up a new company with a ‘puppet’ director. 

The consultation made the point that, unlike other reverse charges, any scheme in the construction sector would not be looking at services which will always be supplied at the VAT standard rate to customers who will always be in business and VAT registered. For example, the supply of a mixed residential, commercial and nonbusiness community project funded by public authority and voluntary agencies could involve several rates of VAT.

HMRC suggested applying the reverse charge to the final customer who takes ownership of the construction project could be an added complication that may be unnecessary to prevent the fraud. There may also be commercial confidentially issues if invoices have to be split. One option would be to make the main or principal contractor the final recipient of any reverse charge supply.

Alan Pearce, VAT Partner at Blick Rothenberg, said: ‘This change will make the recipient of taxable construction services liable for the VAT that the supplier would otherwise have charged. Such a regime has worked well in other areas and not only protects government revenues from fraud but makes administration and cash flow easier for businesses.’

A summary of the consultation responses is scheduled to be published on 1 December.

However, HMRC has indicated that the government has decided not to bring in legislative measures highlighted in the consultation to address the fraud in the construction industry scheme. Instead, HMRC is increasing its compliance response to target the fraud there.

Treasury costings suggest the VAT reverse charge will bring in an additional £90m in 2019/20, £135m the following year and around £150m annually thereafter.

 Closed consultation VAT fraud in labour provision in construction sector

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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