One of the major issues highlighted in the 2017 budget was the need to reduce tax fraud within the Construction Industry Scheme. This was due to certain sections of the supply chain not charging or passing on VAT and are also fraudulently using the gross payment status to avoid deducting tax on the labour element of any contract.
So, fraudulent companies apply for gross payment status and set up a mythical supply chain with no tax being deducted, with the final trader who should have tax deducted ‘disappearing’ from the chain.
HMRC are aware that the vast majority of businesses operating within the CIS are perfectly above board. But those who are not playing by the rules, are costing us tens of millions of pounds in revenue and HMRC are now looking at ways to minimise this risk. They are looking to limit the changes to companies only and limit the changes made to the self-employed, to allow them to carry on as at present.
There have been 2 suggestions made to resolve this, one covers tax deducted at source on the labour element of an invoice whilst the other suggestion looks at how VAT may be charged on the invoice.
For tax deducted at source, there are suggestions as to the level at which building business can apply for gross payment status. This may be raised significantly and there are also suggestions about changing the rules for new or newly-acquired businesses to ensure before being granted gross payment status that they are bone-fide .
For the VAT Element; HMRC are considering introducing a Reverse Charge system for business to business customers only, where both are registered for VAT. Where a business charges the final customer (who is likely to be non-VAT registered) for work carried out, the invoice will be dealt with as normal with full VAT being charged to the end receiver of the service.
In the proposal, the sub-contractor will issue a Reverse Charge invoice (with no VAT charged) and the contractor treats the VAT that would have been charged as both an input and an output tax on their return. However as the building industry is complex with VAT being levied at one or more percentage rates, there could also be an issue with the flat rate scheme and if the two could actually work in tandem. At only one point in the supply chain will the VAT actually be paid to HMRC.
More details should appear soon with how they propose companies to tackle this going forward. See keep your eyes peeled for an updated post!