HMRC to crack down on fraud in construction industry

The Spring Budget announced that HMRC will be holding a consultation on how construction industry contractors will treat their VAT supplies going forwards.

This is to counteract fraud in the provision of labour in the construction sector. This type of fraud occurs when a subcontractor charges VAT on labour, but disappears before paying that VAT over to HMRC. The consultation paper will discuss the feasibility of introducing a reverse charge system whereby the recipient of the labour self-accounts for VAT.

The proposals include introducing a VAT reverse charge and changes to the qualifying criteria for gross payment status (GPS) within the construction industry scheme (CIS).

The consultation shows that there will be a large number of small businesses that are not a fraud risk and will need to apply the reverse charge to their sales.

What’s happening?

The discovery that organised crime groups are setting up or taking over businesses with the intention of fraudulently failing to pay the VAT and making incorrect income tax deductions, by creating companies which artificially extend the supply chain with the intention of making it ‘difficult’ to reconcile the main contractor’s CIS declaration to all sub-contractors below it.

HMRC says:

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.

Another option HMRC are considering is to make the main contractor the final recipient of any reverse charge supply – this means they will be required to account for the VAT on their provider’s sale.

The consultation will close on 9 June.