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UK HMRC construction sector VAT fraud

  • Jun 8, 2018 | Richard Asquith

UK HMRC construction sector VAT fraud

HMRC launched a consultation on 7 June on the introduction of the reverse charge to halve an estimated £100million in fraud in the construction sector. The measure will hit up to 150,000 businesses with significant new administrative burdens and cash flow tightening.

Fraudsters are believed to regularly charge and receive VAT on their invoices, but fail to declare and pay it to HMRC.Organised criminal gangs fraudulently take over, or create new, shell companies to steal VAT whilst operating alongside actual construction services. This is commonly referred to as 'missing trader' fraud.

HRMC proposes reverse charge to save £404m over four years

HMRC has proposed to effectively scrap VAT payments on B2B construction work. The measure, known as the ‘reverse charge’, makes the customer responsible for reporting the transaction; but no VAT payment is made, so cannot be misappropriated.  The consultation includes a draft statutory instrument, which would introduce the change in 2019. It also includes a draft explanatory memorandum, draft tax information and impact note.This estimates a potential saving from the measure of £404million between 2019 and 2023.

VAT fraud in the construction industry has proved stubborn, and HMRC are eager to extend this measure which has worked well in cases of laptop, mobile phone and wholesale electricity fraud. The UK will have to seek permission from the EU to deploy it as it deviates from the EU VAT Directive rules. But the EU should be amenable as other member states have already implemented it.

The reverse charge measure will impact on around 100,000 to 150,000 businesses in the construction and building sector. The impact on business administrative burdens is expected to be significant. One-off costs include: familiarisation with the new rules and adapting VAT accounting systems and processes to enable reverse charge supplies to be calculated and reported. On-going costs include: calculating the reverse charge, keeping records of all reverse charge supplies, checking purchases are correctly treated, and reporting reverse charge supplies on VAT returns.

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VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which won International Tax Review's 2020 Tax Technology Firm of the Year. Richard trained as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.