VAT and the construction industry

HMRC has long seen the construction industry as an area where tax avoidance is rife. The construction industry scheme (CIS) was imposed as a means to prevent labourers dodging tax on cash-in-hand payments.

The latest dodge concerns VAT charged by labour suppliers to their customers, who are normally larger builders. The customer pays the VAT on the supply of labour, and reclaims the VAT as input tax on its VAT return. However, the labour supplier never pays the VAT over to HMRC, and often disappears before the taxman can catch up with them.

To counter this VAT avoidance, HMRC will introduce a reverse charge for VAT on labour supplies, with effect from 1 October 2019. This change is a year away, but it will take time to adjust your systems to the new rules.

Under the reverse charge, the customer (the large building company) will account for the VAT on labour supplies to HMRC, rather than the labour supplier. So the building company pays the VAT to HMRC (output tax) and reclaims that same VAT as input tax. The labour supplier issues an invoice which indicates that the supplies it has made are subject to the reverse charge.

The types of businesses affected by this new reverse charge include those involved in all aspects of construction of buildings or structures, including decoration and cleaning during construction. It won’t cover the work of architects or surveyors. The reverse charge will apply up through the supply chain until the point where the customer is not making a supply of relevant services on to another business.