Domestic reverse charge for fraud in the construction sector

An update from Deloitte on this new reverse charge being introduced in October 2019.

1 March 2018

Further to our article from July 2017 on VAT fraud in the construction sector, HMRC has confirmed that a VAT reverse charge to prevent fraud in the provision of labour in the construction sector will be introduced with effect from 1 October 2019.

This reverse charge will address fraud in construction sector labour supply chains by ensuring that the customer (rather than the supplier) becomes responsible for accounting for VAT.

What will this mean for the sector?

Together with the Federation and a number of housing associations, we have been discussing the content of the reverse charge legislation with HMRC, looking particularly at the impact on the sector, and how it will apply within a corporate group. These consultations are ongoing, with regional events being organised for further discussions with HMRC in the spring.

HMRC’s consultation response concerning the introduction of the reverse charge is likely to make some significant changes to the administration of VAT within an organisation developing homes (where there is any element of commercial development) or with an in-house repairs/maintenance company.

The document confirms that there will be no threshold to avoid creating considerable complexity for businesses and offering fraudsters a means to avoid the measure. However, there will be a long lead-in time for businesses to make the necessary adjustments to their accounting and IT systems as the domestic reverse charge will take effect in October 2019.

Sales to the final business/domestic customer will be outside the scope of the reverse charge – this is good news for housing associations. However, it remains to be seen whether in-house repairs/maintenance companies (that may well be in the housing association’s VAT group) will be treated for reverse charge purposes.

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

How will this affect your organisation?

The forthcoming legislation may require changes to IT systems, training for relevant staff, and consideration of cash flow implications amongst other issues. It should be noted that the reverse charge should not change the amount of VAT paid/recovered by a housing association, but will add to the administrative burden. 

We expect further clarification when the draft legislation and guidance is published in October 2018.

If you would like to be involved in the ongoing discussions with HMRC or require further information on the implementation/impact of the rules, please let John Butler, Will Jeffwitz, or your usual Deloitte contact know immediately.