EU committee backs VAT reverse charge

EU committee backs VAT reverse charge

Member states struggling with the issue of VAT fraud may soon be able to temporarily change the way it is recovered, thanks to a proposed amendment to the EU VAT directive.

Members of the EU committee on economic and monetary affairs recently voted in favour of the generalised reverse charge mechanism (GRCM), which will allow EU member states, including the UK at present, to temporarily apply for exemptions from existing VAT rules.

This would switch the obligation to account to HMRC for VAT from the vendor to the buyer in a move which is intended to combat carousel and missing trader fraud.

Under the existing EU directive, the GRCM can only be employed if certain criteria are met, including 25 per cent of the VAT gap being due to carousel fraud.

The amendment would stipulate that countries should be required to “establish that estimated gains in tax compliance and collection expected as a result of the introduction of the GRCM” exceed the compliance cost to businesses and the administration of tax.

It adds that “businesses and tax administrations will not incur costs that are higher than those incurred as a result of the application of other control measures”.

The proposal will now have to be ratified by EU member states in 2019 before it becomes law.

The UK Government has already announced the introduction of a VAT reverse charge mechanism for specified types of construction work from 1 October 2019.

As a group, building sub-contractors typically have minimal VAT costs to recover, with their main outgoings being workers’ wages, which are not subject to VAT.

However, they are required to charge VAT on the service of supplying their workers, which has led to some unscrupulous sub-contractors attempting to evade VAT by ‘going missing’.

This is why HMRC is introducing the reverse charge in the construction sector which will place the responsibility on a contractor or developer to account for the VAT on the services of any sub-contractor.

If you are concerned about the implications of the reverse charge and how it would affect your recording and collection of VAT, please contact us.