Do you know that there is a major consultation going on about VAT in the construction industry which could have major implications for you?
Firstly, let us explain why HMRC want to do something so radical. Secondly, we’ll outline what they want to do, and finally, we’ll describe what the Federation and the Joint Tax Committee have said to the consultation and why. It can be quite daunting but if the changes are legislated, you will be informed as to why this is such a contentious subject.
The problem as HMRC see it.
HMRC are suffering from attacks on the revenue made by organised criminals. These people deliberately set up construction companies – or buy them – and get them gross CIS status (often by straightforward lying and manipulation). They have ‘bent’ contacts in the construction industry, who place contracts with them to do the sort of work that requires large numbers of net CIS workers. The workers are introduced to the rogue trader, who does the work, claims payment plus VAT and then disappears before paying the VAT to HMRC. The disappearing firm usually also takes with it the CIS tax of all the workers. This is quite a windfall and means that they can price very competitively to win work because they haven’t any tax overheads.
Whilst very few people in real construction have any experience of this, it is not for us to deny that it happens. HMRC are professional tax collectors and if they say they are under attack it is reasonable to believe them. The tax lost is our money after all.
What they propose to do
HMRC are proposing that where a job is subject to VAT and money is to be paid to the subcontracting company for that work, the paying contractor does not actually pay the VAT to the subcontractor, they pay the subcontractor net, paying the VAT straight to HMRC.
The paying contractors return will then have VAT paid and VAT reclaimed just as now, but the money will pass from the payer to HMRC rather than to any subcontractor.
This affects you because your firm will be a subcontractor AND will sometimes pay subcontractors. So, under the proposals you would not hand over any VAT to any VAT registered subcontractor but would pay it direct to HMRC. Anyone paying you would not add the VAT due to the payment but would pay it to HMRC themselves.
So just at this level of complexity, the measures proposed will change the cashflow in your business and there may be an issue if you have been using VAT collected to pay bills – if you have been trading hand-to-mouth.
What has the Federation and the Joint Tax Committee said?
The proposals were more complicated than we’ve explained so far. HMRC quite sensibly wanted to keep small traders unaffected by the changes so were proposing to only reverse charge when:
- a contract price was over a certain threshold.
- payments to a subcontractor had exceeded a cumulative threshold in a month or were over a certain amount.
They also thought that any threshold might apply only to the labour element of any job.
The response that we have made has said:
That no one in construction has the time and resources to divide any payments between labour and materials in a fashion that is scientific and can’t be manipulated.
That a contract price changes all the time with variations and claims and that the accounts office will have little day-to-day access to information about contracts to monitor whether they have topped any threshold and therefore what they should be doing with VAT.
That keeping track of cumulative totals of amounts paid to subcontractors in a year with a view to changing the way you handle VAT mid-year would be impossible.
Thus, we have said that if the measure is to be enacted it must apply to all payments covered by CIS in full, with a single rule for all payments – absolutely all payments reverse charged. If Construction is to cope with the complexity of the change VAT would be reverse charged the length and breadth of the Construction chain. We have gone on to say that the change would be enormous and would cost a very great deal in training personnel, purchasing new software and correcting mistakes. Furthermore, we have said that it simply isn’t what should be done when every taxpaying firm should be focusing on the Making Tax Digital change – which will be confusing enough in its own right.
NFRC members that would like to read the full consultation and the response, please email us.