The ways in which VAT issues are handled between contractors and subcontractors in the construction sector is set to change as the result of new rules revealed by the chancellor of the exchequer in his autumn Budget.
Philip Hammond made announcements to that effect after a consultation process led the government to conclude that there are better ways to ensure VAT payments are made properly by relevant parties in the construction industry.
The change means that contractors will soon be required to pay VAT amounts directly to HRMC when they use subcontractors to hire labourers to work on building projects throughout the UK.
Previously, subcontractors took responsibility for making payments of VAT amounts to the tax authorities, having billed their contractor for the relevant amounts they expected to be liable for.
In future, a VAT domestic reverse charge will effect a reversal of the way that process works, with the government hoping the adjustment of these rules will reduce scope for VAT fraud to be committed among construction companies, subcontractors and service providers.
After its consultation process on these issues, the government was convinced that its existing rules were leaving open opportunities for criminals to use the construction industry’s VAT rules as a means of committing large-scale tax fraud.
In particular, the feeling was that fraudsters could charge VAT as a subcontractor, not pay the amounts to HMRC and then disband their businesses in ways that made them subsequently very difficult to track down.
Hopes are that those situations will now be avoided with contractors soon to be asked to account for VAT payments themselves when they hire subcontractors.
The new rules on the matter will officially come into effect in October 2019, with the date scheduled in order to give construction sector contractors and subcontractors plenty of time to make what adjustments might be made necessary in the coming months.
Outlining the reasoning behind its proposals, HMRC’s consultation paper on the subject said: “We recognise that the vast majority of businesses in the construction sector meet their obligations in full and on time.
“It is precisely to protect honest taxpayers that we are consulting on key proposals for disrupting and closing down the operations of those cheating the system.”