Natalie Guest and Gavin Birchall in Scrutton Bland’s tax team look at a new initiative designed to prevent fraud in the construction industry. I t’s all change in the VAT world. Making Tax Digital comes into force in April 2019 and October that year will see another major shakeup of VAT rules aimed at the construction industry. According to Her Majesty’s Revenue and Customs (HMRC), large numbers of labour- only subcontractors are committing a major fraud known as the Missing Trader Fraud, which is costing the Exchequer an estimated £100 million a year. The perpetrators charge the customer VAT and liquidate their company without paying the collected tax over to HMRC. VAT liability is generally determined by reference to a “supply”. A supply can include several transactions, or sometimes a transaction can include more than one supply. VAT legislation does not prescribe what should be done in every eventuality and HMRC do not offer much guidance on the matter and merely observe that ‘there is no simple, single answer as to whether a transaction comprises a single supply or several different supplies — the answer will always depend on the facts of each case. The decision will be a matter of judgement based on an objective assessment of all the facts and circumstances.’
To prevent this perceived loss of tax revenue HMRC has decided to make the customer, ie the person hiring the labour, rather than the supplier responsible for tax accounting. This means that the customer will no longer pay the VAT charge to the supplier, but will instead include it on their own VAT return as both ‘output’ and ‘input’ tax. This should eliminate cash VAT refunds where the supplier fails to pay VAT to HMRC. The new rules will apply to the standard (20%) and lower (5%) rated supplies of ‘construction services’. Construction services are defined in the same way as the current definition within the construction industry scheme (CIS). So if a contractor or subcontractor is already within the CIS, it is safe to assume that they will also need to follow the new reverse charge procedure. Certain activities are specifically excluded, including professional services, manufacturing, delivering equipment or materials. Unlike the CIS there are no provisions to extend the changes to so called ‘end user’ businesses which commission large construction projects, e.g. retailers occupying significant real estate. The view of Gavin Birchall, Tax Partner at Scrutton Bland who regularly advises clients in the construction industry is that: “A few complications will naturally arise. For instance, there is no segregation of labour and materials as currently under CIS. The draft legislation requires that any goods supplied within the “construction services” should be treated as part of a single supply of services. Having defined which services are construction services and which services are specifically excluded, the draft legislation goes on to say that whenever excluded services and construction services form a single supply, they will be subject to the reverse charge procedure.”
The flowchart below illustrates potential areas of difficulty in relation to contractual arrangements observed in the construction industry supply chain. The transaction flows highlighted in red were perceived by HMRC as open to the missing trader fraud and transactions highlighted in green were generally excluded from the scope of CIS and the new reverse charge rules. However there are some grey areas. For example, a project manager providing professional services can bring along a subcontractor. Now they have to apply the reverse charge procedure, but how are they supposed to know whether or not their client is also supplying “construction services”? The draft legislation does not define what a construction business is and instead operates by referencing supplies. Let’s say a person A makes a supply of construction services to person B. If B then makes an “onward supply of construction services”, then both A and B should both follow the reverse charge procedure. However, if B does not make supplies of construction services, then the reverse charge does not apply. It is not clear how A is supposed to know what B does after A has done their work. It is important to correctly identify business practices where the new reverse charge would apply and to prepare in good time before the legislation becomes effective and each case will be different. It is important to seek professional tax advice in order to ensure that you are compliant and to avoid a hefty fine. Gavin Birchall and Natalie Guest are specialists in advising clients in the construction sector on tax and VAT issues. You can contact the tax department at Scrutton Bland on 0330 058 6559.
Sub contractor
Architect
Sub contractor
Quantity surveyor
Raw Materials
Structural engineer
Project manager
Component Manufacturer
Sub contractor
Sub contractor
Developer, also contractor?
Component Manufacturer
Main Contractor
Sub contractor
Sub contractor
Client / End user
Component Manufacturer
Sub contractor
Sub contractor
Finance
Landlord
Group Co. A
Builder Merchant
Supply and fit contracror
Tenant
Group Co. B
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