It was announced in 2017 that a reverse charge for building work would be introduced on 1 October 2019 in order to combat ‘missing trader’ fraud. The idea was first put forward in the Budget in March 2017 and, following a consultation exercise, confirmed in the November Budget.
According to the latest consultation:
“Fraud in construction sector labour supply chains presents a significant risk to the Exchequer ….
“Organised criminal gangs create contrived supply chains to enable them to perpetrate what is commonly referred to as ‘Missing Trader’ fraud often operating alongside legitimate construction services.”
According to the report, it is thought that the reverse charge could result in the collection of an additional £100 million a year in extra VAT.
It goes on to say:
“This is most commonly found among sub-contractors who provide groups of workers to the construction sector. They have low VAT costs to recover, their main cost being wages, which are not subject to VAT.
“But they are required to charge VAT on the service of supplying their workers to other contractors. An incentive therefore arises to evade the high net VAT payable by going missing or committing other forms of fraud.”
The reverse charge mechanism will place the responsibility on a contractor to account for the VAT on the services of any sub-contractor.
It would treat the same amount as input tax on the same VAT return and, assuming that it was using the services in making taxable supplies itself, it would be able to recover it in full.
For the contractor, then, the reverse charge would normally have no net impact. Crucially, however, the sub-contractor would no longer be receiving the VAT, and would no longer be able to go missing with it.
This mechanism is already well-established for acquisitions of goods from other EU Member States and for services imported from abroad and has been used to tackle missing trader fraud in the supply of specified goods and services, primarily mobile phones.
The reverse charge will apply to building contractors, i.e. those whose supplies are of building work, where they engage sub-contractors.
It is possible that it will also apply to developers, i.e. those commissioning building work but not to occupiers commissioning works on their own account.
Whether anyone should pay VAT on building work, account for VAT on building work, or apply the reverse charge will depend on their role in the project as:
- a sub-contractor, whose supplies are to another contractor;
- a (main) contractor or developer, whose supplies are to a final customer; or
- a final customer, who is typically commissioning building work as occupier or intended occupier of the property. The reverse charge will apply both to labour and materials when supplied together but the supply of materials alone will not be covered and will follow the normal rules.
- The key points to note are:
- This is about the person’s role in the project, not the nature of their business. Roles might therefore vary from project to project or from time to time and the rules will extend to businesses that occasionally act as contractors.
- Contractors making supplies to a final customer will need to check that it really is a final customer, acting as such, so that they can charge VAT. There may be a temptation, of course, simply to charge VAT and wait for the customer to question it.
- Contractors and developers engaging anyone else as a contractor will need to check that they are registered before applying the reverse charge. There may be a temptation not to bother and just to reverse charge anyway.
- Contractors and developers will need to ensure that that they are not charged VAT incorrectly, and to do so when payment is made, not merely when they complete their VAT returns. Where VAT is actually due on a payment, and recoverable, they may need to be able to demonstrate this to HMRC.
- Sub-contractors and contractors working for developers will need to check that their customer is VAT-registered and subject to the reverse charge, before concluding that they do not need to charge VAT.
We will keep you updated on the details of how the reverse charge will work following release of legislation which is expected at some point in the coming weeks.