07/12/2017

Action against supply chain fraud in the construction sector (UK)

Customers will become responsible for accounting for Vat on construction industry transactions with effect from 1 October 2019, when the government will implement the Vat reverse charge announced in Autumn Budget 2017 to tackle ‘missing trader’ supply chain fraud.

Missing trader fraud* was highlighted in a consultation** announced in Spring Budget 2017 to look at ways of tackling construction sector supply chain problems. Given that there are around 300,000 UK businesses in the sector, fraud threatens ‘significant risk to the public revenue’ and tackling it could save, on average, an estimated £100m pa.

‘Fraud on provision of labour in construction sector: consultation on VAT and other policy options’ summarises responses to the policy options described in the consultation, including

  • the introduction of a Vat reverse charge
  • changes to the qualifying criteria for gross payment status within the Construction Industry Scheme

The consultation also stressed the importance of ensuring any options adopted did not adversely affect honest small and micro construction firms.

The Vat reverse charge makes the customer in a transaction responsible for accounting for Vat so the supplier will never obtain custody of the tax due and will therefore be unable to ‘go missing’ with it. The majority of EU member states operate a reverse charge mechanism for construction services.

To address concerns about the impact on legitimate businesses

  • the measure does not take effect until October 2019, allowing businesses plenty of time to make necessary adjustments to their accounting and IT systems
  • sales to the final business or domestic customer are out of scope of the Vat reverse charge, which will reduce complexity for developers
  • there will be no threshold to avoid complexity for businesses and offering fraudsters a means to avoid the measure

HM Revenue & Customs also decided not to proceed with options to strengthen the qualifying criteria for Gross Payment Status (GPS), because consultation feedback concluded the impact on legitimate businesses would be disproportionate to the level of fraud addressed.

* Missing trader supply chain fraud occurs when organised criminals acquire new or existing businesses in order to contrive supply chains to operate alongside actual construction services then ‘go missing’ when HMRC identifies potential Vat or income tax fraud. It is most commonly found among sub-contractors who supply workers to the sector.

** ‘Tax Fraud in Construction Industry Labour Provision (UK)’, CPA News, 23 March 2017.

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