A reversal in the way tax is paid in the construction industry will see contractors pay VAT directly when using subcontracted labour. It had previously been the case that subcontractors charged VAT when supplying construction industry labour to contractors.
However, the introduction of ‘a VAT domestic reverse charge’ announced in this week’s Budget will see contractors account for VAT directly.
The change, which the government hopes will prevent VAT losses, follows an construction industry consultation on the issue. The government said the primary way in which it hoped to prevent losses was by combating tax fraud with the new system.
It said the current system was open to criminals who file fraudulent tax returns and collect the VAT without paying it over to HMRC. The fraudsters would then deliberately extend the supply chain, making it harder for HMRC to track down those responsible, with the labour moved on and the offending company disbanded by the time the tax office uncovered the source.
In February this year nine men from the North-west were sentenced to a combined 102 months in jail for tax evasion, having exploited the current system.
The new changes will come into effect on 1 October 2019.
The government said this lead-time reflected “responses to the consultation and the government’s commitment to give businesses adequate time to prepare for the change”.
Explaining the new rules to Construction News, Robert Facer, VAT director at accountancy firm Menzies, said: “These transactions have been open to fraud, partly because while the cost of VAT on sales is significant, there is little VAT payable on costs.
“For this reason, fraudsters can set up a business to supply labour and charge their customers VAT only to disappear from view when HMRC chases up their VAT return.
“From the 1 October 2019, any contractor using labour supplied by a third party will be required to treat the arrangement as a ‘self supply’ when accounting for VAT.
“This means they will have to pay VAT directly to HMRC on the services they receive and then reclaim the VAT through their VAT return in the usual way. This effectively cuts the supplier out of the loop altogether.