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Out-Law News 2 min. read

'Reverse VAT charge' proposed to tackle construction sector labour fraud


Contractors could become responsible for accounting for VAT on construction labour services that they purchase under plans put forward for consultation by HM Revenue and Customs (HMRC).

HMRC is seeking views on what should be covered by any 'reverse charge' VAT accounting mechanism, to ensure that it effectively tackles what the government sees as a growing problem of organised fraud in construction labour provision. Organised crime groups have been setting up construction labour businesses with the intention of fraudulently failing to pay VAT and making incorrect income tax deductions according to a consultation, which closes on 9 June.

Tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, said that the policy was "the latest in a long line of developments trying to make big businesses play a greater part in the war on tax evasion".

"The reverse charge in particular has been an effective weapon in tackling VAT evasion in other sectors, so appears to be a proportionate response," he said.

"However, with the corporate criminal offence coming through in September, businesses really need to step up their vigilance generally. The new legislation will mean that boards cannot rely on a lack of knowledge about what is going on in their supply chains. A single instance of tax evasion facilitated by an employee whilst performing duties could amount to a criminal offence for the employer as well. Putting in place new procedures to manage external taxpayer risks is fundamental," he said.

HMRC has identified two routes through which fraudsters have been exploiting the construction labour supply chain in order to profit on mis-declared VAT liabilities and Construction Industry Scheme (CIS) fees. Both models usually involve artificially elongated supply chains, making it more difficult for HMRC to identify any underpaid VAT or income tax. The department is currently investigating cases which have cost the exchequer "tens of millions of pounds" in lost revenue, according to the consultation.

The first fraud route identified by HMRC involves fraudsters taking over an existing, legitimate business, while the second requires the fraudsters to obtain a new 'off the shelf' company fronted by a 'puppet' director with a clean compliance record so that the company can register for VAT and the CIS without raising any alarms. Once HMRC catches up and identifies the fraud, the business will often collapse and the workforce transferred to another entity which then carries on the fraud, according to the consultation.

HMRC has already introduced domestic reverse charges for certain telecoms and energy transactions, and has found it to be "very effective" at tackling so-called 'missing trader' supply chain fraud. However, given the size of the construction sector, it is concerned that implementing a reverse charge throughout the sector would disproportionately impact on honest, smaller businesses. It is therefore seeking views on what services should be covered by a reverse charge, and whether it should apply to supplies to final customers or to limit it to the main or principal contractor.

The consultation also proposes tightening the rules around gross payment status (GPS) within the CIS. This could include changes to the turnover test, to make it more difficult for fraudsters to show that they are legitimate businesses with established trading history. GPS is available to subcontractors that have registered with the CIS and allows them to receive any payments due to them free of the deductions for tax and national insurance contributions that would otherwise be made.

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