British tax system to change for contractors19 December 2017
Great Britain - In an attempt to tackle VAT fraud in the construction industry, the Government announced on the day of its latest budget that it will introduce a domestic reverse charge’ VAT scheme for construction services.
This will shift responsibility for paying VAT along the supply chain, reportedly in order to remove the opportunity for it to be stolen. Changes will have effect on and after 1 October 2019.
Alan Pearce, VAT Partner at London-based accountant Blick Rothenberg, explained, “This change will make the recipient of taxable construction services liable for the VAT that the supplier would otherwise have charged. Such a regime has worked well in other areas and not only protects Government revenues from fraud but makes administration and cash flow easier for businesses.
“Normally a sub-contractor would charge and collect VAT, issuing a tax invoice to a main contractor for construction services supplied. The main contractor is entitled to recover the VAT from Her Majesty’s Revenue and Customs (HMRC) as input tax. If the sub-contractor then fails to account for the corresponding output tax (in error or by a deliberate act of fraud) HMRC has lost revenue.
“The domestic Reverse Charge mechanism would mean the main contractor self-assess the VAT (i.e. charges and reclaims the VAT) so there is no payment of VAT passing between the two. As the subcontractor does not charge or receive any VAT he is not in a position to benefit by not declaring it to HMRC.”