VAT fraud in construction industry in HMRC’s sights

In response to the escalating issue of organised fraud that has arisen within the construction sector, HMRC has recently launched a consultation to tackle what they perceive as a major risk to the public revenue –indicating a potential increase in the number of investigations into construction businesses.
The consultation will seek the views of stakeholders and individuals on a range of policy and legislative options from the introduction of a VAT reverse charge, to qualifying criteria for gross payment status within the Construction Industry Scheme (CIS), signalling HMRC’s commitment to reducing the tax gap within the construction sector.
This measure from HMRC is targeted to combat situations where a subcontractor may charge VAT on labour, but then “disappears” before passing that VAT to HMRC. The proposed changes have been successfully implemented in other industries affected by carousel fraud, such as mobile phones, emissions allowance and computer chips.
As it currently stands, the difference between the amount of tax that should be collected and what actually is collected by the HMRC stands at £36 billion. It’s the smallest tax gap in 10 years but the government are still persistent and will be targeting SMEs in the near future.
It doesn’t matter how well prepared your accounts are. HMRC will be looking at VAT returns as well as using their tax-collecting supercomputer, Connect database which can collect a whole array of information including taxpayer’s financial affairs, spending habits and expenditure. Whether your accounts are correct or not, they’re conducting enquiries into many businesses to close the tax gap, even raising spurious VAT assessments with no proper basis. Businesses are therefore strongly advised to protect themselves by taking out tax investigation insurance so that they are covered in the event of a HMRC investigation.
Our VAT team commented on the consultation: “HMRC have clear intentions that construction businesses are in their sights, and VAT accounts for a significant proportion of the tax gap. Construction firms need to ensure they’re fully compliant, which can be somewhat confusing and complex. With HMRC’s aggressive approach to minimising the tax gap, it’s likely that HMRC will be spending more time investigating businesses in the construction sector.
To find out more about how our VAT specialists can assist your property and construction business, contact us.

This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.