Fraud on provision of labour in construction sector: consultation on VAT and other policy options

HMRC has published a summary of responses to the consultation that it launched in March 2017 on options for combatting fraud on labour provision in the construction sector.

For income tax purposes, it has been decided not to proceed with the measures discussed in the consultation about making the qualifying criteria for Gross Payment Status (GPS) in the Construction Industry Scheme more stringent. Instead, HMRC will increase its compliance response to more robustly assess businesses applying for GPS for evidence of fraudulent activity.

For VAT purposes, it has been decided to introduce a domestic ‘Reverse Charge.’ This means that the customer in the transaction becomes responsible for accounting for the VAT. The supplier will never obtain custody of the tax due and hence cannot steal it.

In response to feedback received, there will be a long lead-in time for businesses to make necessary adjustments to their accounting and IT systems, with the new requirements not being implemented until October 2019.

It has been confirmed that there will be no threshold, to avoid creating considerable complexity for businesses and offering fraudsters a means to avoid the measure.

For Flat Rate Scheme (FRS) users, the government believes that having an exclusion would create an added on-going burden for the sector at the part of the supply chain most vulnerable to fraud. Therefore, on balance, it has decided that the reverse charge will be easier to administer for businesses, and more effective in tackling the fraud, if it applies to FRS users.

Although more finely balanced in terms of responses, it has also been decided that, as the fraud is not found at the final customer stage, supplies to the final customer will be excluded from the reverse charge procedure. HMRC will publish a technical consultation on draft legislation for a VAT reverse charge in spring 2018 that will address any definition issues for this exception.

A final draft of the legislation and guidance will be published by October 2018. In the meantime, HMRC will set up stakeholder implementation groups to work with businesses to support them in making the change.

ICAEW responded to the consultation in ICAEW tax representation 69/17.