10 July 2018
As part of the continuing fight against VAT fraud, the government proposes to apply the reverse charge process to the supply of construction services.
Currently, if a VAT-registered labour-only subcontractor supplies construction services to a contractor, the subcontractor needs to add VAT to his invoice, which will be at 20%, unless it's in respect of, say, a residential new build. On receipt of the invoice, the contractor will be able to reclaim the VAT charged and the subcontractor will need to pay over the output VAT collected to HMRC.
Some subcontractors are collecting VAT on their invoices and then disappearing before paying over the VAT to HMRC. This is the essence of so-called Missing Trader Fraud. Of course, Missing Trader Fraud shouldn’t be confused with the problem of missing tradesmen, who turn up on the first day of a job and then aren't seen again for days or weeks!
The aim of the proposed rules is to deny access to the output VAT by any elusive subcontractors and put accounting for the VAT in the hands of, hopefully, more responsible contractors. We’ll gloss over Carillion at this point…
Under the proposed rules, a supply of services within the construction industry will give rise to an invoice that does not have VAT on it. It will then be up to the contractor to account for output VAT on the invoice and also reclaim the VAT charged, if it's appropriate to do so. This is broadly the same process as applies when a business in the UK receives goods from a supplier from elsewhere in the EU. The UK business has to account for both output and input VAT.
Similar measures have been put in place previously with regard to other industries affected by Missing Trader Fraud, for example, the supply of mobile phones and computer chips.
The new rules are only intended to apply to supplies within the construction industry and supplies to consumers and businesses who are not in the construction industry are not intended to be governed by these changes.
HMRC have published guidance on the new legislation and there is a consultation open until 20 July 2018. Once the responses have been digested, it is intended that draft legislation will be brought forward in October 2018, with implementation not happening until October 2019.
What are likely to be the practicalities of this? For subcontractors, who source labour either from employees or from subcontractors who are not VAT-registered, then cash flows on the supply side will not change. However, incoming cash flow will be lessened as there will be no VAT to be collected from contractors, which may be relied by some subcontractors. This is only a temporary position and, of course, quarterly VAT payments balance this out, but subcontractors may wish to consider their cash flow position ahead of the introduction of the new rules.
There is also the additional headache of differentiating between construction industry and non- construction industry customers and it will not be possible to uniformly charge VAT on all invoices, which may be further complicated by construction industry customers who are not VAT-registered. These are likely to be rare, as you will see below. However, it may take a little time to get used to this way of working.
For any contractors receiving services from subcontractors, it will be necessary to find out if the subcontractor is VAT-registered and account for VAT appropriately. For smaller contractors and those just starting up, it may cause VAT registration to become necessary sooner than currently. For example, if a small contractor receives supplies within the construction industry of, say, £30,000, marks up that supply and adds some services of its own, giving sales of, say, £60,000, the supply received within the construction industry will need to be treated as an output for VAT purposes, giving overall outputs at £90,000 and hastening a requirement to register, as the £85,000 threshold will have been breached.
As yet implementation is at least 15 months away, but I would urge you to look at the consultation and feedback any comments to HMRC. Alternatively, if you have any difficulties with this or any other construction industry tax issue, please get in touch by filling in our contact form here.