The Chancellor’s most recent Budget contained new measures to combat VAT avoidance by companies in the UK.

As part of the Treasury’s strategy to combat ‘missing trader’ VAT fraud, contractors in the construction industry will have to grapple with confusing changes to the VAT system that could affect their cashflow.

The changes will also have an impact on umbrella companies and agencies that deduct payments from contractors through the Construction Industry Scheme (CIS).

Missing trader fraud occurs when a supplier charges VAT and is paid before they ‘go missing’ without filing a tax return or passing the VAT money to the exchequer.

To combat this, the Treasury will introduce a reverse charge, which means that it’s the responsibility of the customer-facing business to account for VAT to HMRC.

The change will take effect from October 2019.

In general, the reverse charge will work along the same lines as the CIS. With CIS main contractors, umbrella companies and recruitment agencies deduct money from sub-contractor payments and pass it to the tax authority.

This will not affect small construction businesses that aren’t CIS-registered, as these companies sell their services directly to homeowners and other customers. They will continue charging VAT as normal.

It will mainly affect other contractors and sub-contractors that supply their services to main contractors or work through an umbrella company or recruitment agency.

The reverse charge will mean that CIS-registered contractors and any agencies that pay CIS-registered contractors will need to make important change their accounting systems to stay compliant.

Any contractors that are heavily reliant on VAT income moving up the supply chain may need to be prepared for future cashflow problems.

Larger organisations and agencies that deal with a lot of different contractors will need to make sure that they have a clear understanding of when the reverse charge applies.

Reverse charging will apply to a whole range of building and industry services, including related services like alterations, repairs, demolition and more.

Professional services like those provided by architects, surveyors and consultants will not be included in the change.

The new measures have been introduced because a growing number of VAT fraudsters are setting up in the construction industry. They exploit the complex rules by setting up or purchasing construction companies before siphoning off VAT money as it moves up the supply chain and closing the business or disappearing before HMRC has a chance to ask for it.

The scam started off in the electronic goods trade, but fraudsters have changed tactics and changed industries as government clamped down on other sectors in the economy.

Miles Grady, Director of Umbrella.co.uk said: “To prepare for the change contractors and agencies need to be clear about where services are being supplied to other construction businesses and where services are being supplied to an end-consumer.

“They also need to know which services are included in the reverse charging system. And this won’t always be cut and dried. Contractors and agencies should start preparing for this change now, so they aren’t caught short next autumn.”

For more advice, speak to a member of our team. Call Umbrella.co.uk: 0800 121 6513.