Tackling VAT fraud in labour provision in the construction sector

The responsibility for accounting for VAT in the construction sector is soon to change. The Government announced in the recent Budget that it will introduce measures to combat VAT fraud within the construction sector by applying the VAT ‘reverse charge’ to the sector. This will shift responsibility for accounting for VAT  along the supply chain and thereby reduce the scope for fraud.

In other words, this means VAT will not be charged in certain supplies of construction services performed in the UK. Instead, the responsibility for accounting for this will fall to the customer (typically the main contractor) to ‘self-charge’ the VAT and then recover this to the extent they are able to. This could result in an absolute cost if that customer is not able to fully recover VAT.

Whilst precise details on how it will operate and in what circumstances are yet to be determined, it is understood that the reverse charge will not apply to zero-rated services or supplies of house-building services to the final consumer. In addition, the Government believes that the definition of construction services should follow the construction industry scheme (CIS) definition, and therefore have as few exceptions as possible. This may mean that some sub-contractors will still be required to charge VAT in the normal way. The changes raise a number of potential challenges for affected businesses, such as the need to understand and manage the impact on cash-flow and to address additional internal training needs.

Draft legislation will be issued in Spring 2018 for consultation, with a final draft of the legislation and guidance being published by October 2018 for implementation by 1 October 2019. Whilst this represents a relatively long lead-in time, it is not too early for affected businesses to understand, and begin initial preparations for, the impact of these expected provisions.

For more information, please contact Andy Ilsley or your usual RSM contact.