Construction companies need to remain alert for VAT fraud

Out-Law News | 17 Sep 2019 | 3:11 pm | 2 min. read

Companies in the construction sector need to remain alert to VAT fraud in their supply chain, even though the introduction of the VAT reverse charge for construction services has been postponed until 1 October 2020.

A VAT 'reverse charge', originally due to be introduced in the UK for building and construction services from 1 October 2019 has been postponed to 1 October 2020.

VAT disputes expert Clara Boyd of Pinsent Masons, the law firm behind Out-Law, said that even though the delay was "welcome", businesses in the construction industry "should not just sit back for a year".

"HMRC is ramping up its action against fraud in the sector and businesses could find themselves the subject of an HMRC investigation and have VAT input tax recovery denied and penalties imposed if they do not carry out adequate due diligence on their supply chain," she said.

Boyd Clara

Clara Boyd

Partner

HMRC is ramping up its action against fraud in the sector and businesses could find themselves the subject of an HMRC investigation and have VAT input tax recovery denied and penalties imposed if they do not carry out adequate due diligence on their supply chain.

The reverse charge is being introduced to combat VAT fraud in the building and construction sector by making a customer within the construction sector responsible for paying the VAT direct to HM Revenue & Customs (HMRC) rather than paying it to the sub-contractor. This prevents the sub-contractor purporting to charge VAT to its customer and then absconding with the VAT.

The document announcing the delay said:  “HMRC remains committed to the introduction of the reverse charge and has already increased compliance resource. It has put in place a robust compliance strategy for tackling fraud in the construction sector using tried and tested compliance tools."

"In the intervening year, HMRC will focus additional resource on identifying and tackling existing perpetrators of the fraud," the document said.

VAT recovery can be denied by HMRC where a business "knew or should have known" that the purchases it made were connected with the fraudulent evasion of VAT.

"Businesses in the construction sector will need to ensure they have clear policies and processes for vetting and checking the identity and VAT numbers of sub-contractors. They will also need to provide training and guidance for staff and ensure that robust records are maintained to ensure they can demonstrate to HMRC that they have taken reasonable steps to verify the integrity of their supply chain," Clara Boyd said.

"Particular care needs to be taken in relation to due diligence for new sub-contractors. A warning sign of VAT fraud can be a price that looks too good to be true," she said. "However, it is not only at the supplier take-on stage that red flags can be identified. Businesses are required to monitor their relationship with suppliers and customers on an on-going basis."

"Trying to recover unpaid VAT from the fraudsters themselves can be a difficult task for HMRC as they will often be long gone.  It will be easier for HMRC to recoup some of the loss to the Treasury by denying VAT recovery of legitimate businesses in the chain which have purchased directly or indirectly from the fraudster," Clara Boyd said. 

"A common misconception is that HMRC can only refuse a business recovery of its input tax on the grounds that it knew or should have known its transactions were connected to a VAT fraud if HMRC have warned businesses of the risk of fraud and an inadequate response to the risk is taken. This is not correct. If HMRC make enquiries in respect of dealings with sub-contractors, businesses should take professional advice on how to respond," she said.

Although the reverse charge has been delayed, HMRC has other means to combat tax fraud in the construction industry. Construction businesses should be mindful of the corporate criminal tax offences (CCOs) that were introduced on 30 September 2017 and make a business criminally liable if it fails to prevent its employees or any person associated with it from facilitating tax evasion. A business will have a defence if it can prove that it had reasonable procedures in place to prevent the facilitation of tax evasion.