The move has been prompted by the discovery that organised crime groups are setting up or taking over businesses with the intention of fraudulently failing to pay the VAT and making incorrect income tax deductions, by creating companies which artificially lengthen the supply chain with the intention of making it difficult to reconcile the main contractor’s CIS declaration to all sub-contractors below it.

HMRC says losses from this type of fraud are ‘significant’, with estimates in the tens of millions of pounds. The consultation will consider policy options first set out in Budget 2017, such as introducing a domestic reverse charge applies which would take VAT payment out of transactions so the provider of the goods or services cannot disappear or fail to pay the VAT due.

Any such charge would operate in a similar way to the rules around the supply of mobile phones and computer chips, although HMRC says its view is that monthly sales lists will not be required on the VAT return for labour provision services.

HMRC acknowledges that for the purposes of a reverse charge both parties need to be VAT registered, which in construction could mean a large number, size and variety of providers and customers are affected, complicated by the different rates of VAT that can apply.

HMRC says it thinks applying the reverse charge to the final customer who takes ownership of the construction project could be an added complication that may be unnecessary to prevent the fraud. One option is to make the main or principal contractor the final recipient of any reverse charge supply, i.e. they will be required to account for the VAT on their provider’s sale.

An alternative would be to keep to the principle that the reverse charge applies all the way through the supply chain to the final customer, but to apply a rule whereby the reverse charge ceases to apply if the amount of non-labour provision (for example, materials) exceeds a certain amount of the overall value.

The consultation highlights that potentially there will be a large number of small businesses that are not a fraud risk that will need to apply the reverse charge to their sales. HMRC proposes a number of options for excluding small businesses, such as applying a sales based threshold, or having a narrower CIS definition of the services affected, or some other qualifying criteria. It also asks for views on how the proposals would interact with the Flat Rate Scheme (FRS) available to businesses with a turnover of up to £230,000.

HMRC points out that reverse charges have historically been introduced quite quickly and with very little notice, in order to close down fraud. It suggests a ‘light touch’ period of around six months could be available to support companies going through the change in approach.

As regards potential changes to the CIS regime, HMRC says it may be appropriate to limit any changes to companies, rather than sole traders or partnerships. One option would be to consider changes to the turnover test for new companies only, such as increasing the GPS turnover threshold, and increasing compliance test for both new and existing companies.

The consultation closes on 9 June.

Consultation, Fraud on provision of labour in construction sector: consultation on VAT and other policy options, is here.