Calling all labour supply companies in construction – Trying to prepare for the VAT reverse charge?

We have been in contact with Nick Chambers, HMRC, VAT Serious Non-Compliance and Fraud Team, who has confirmed the reverse charge in construction, due to take effect in October 2019, does not apply to umbrella companies or agencies who supply labour within a construction supply chain.

HMRC said it was not their intention to capture construction labour supply chains and that they hadn’t appreciated the uncertainty the legislation’s introduction would have on entities involved in a such a supply chain, which is why they did not consult with umbrella companies or agencies.

They made it clear to us that legislation will not be amended and so, we will have to await further guidance that formally addresses this point. We have been told to expect this in April 2019.

Why doesn’t the reverse charge in construction catch umbrella companies or agencies?

Umbrella companies and agencies supply “construction operations” for CIS purposes, but not “construction services” for VAT purposes.

Section 74 of the Finance Act 2004 defines a “construction operation”. Section 74(1)(a) confirms that the work of individuals carrying out construction operations listed in section 74(2) is a construction operation.

Whereas, Article 4 of the VAT (Section 55A)(Specified Services and Excepted Supplies) Order 2019 does not include such provision and so, the supply of labour undertaking the construction services listed in Article 5 is not caught.

Unfortunately, HMRC’s guidance in relation to the reverse charge which was published in November 2018, contradicted the legislation in stating;

“The domestic reverse charge will only affect supplies at the standard or reduced rates where payments are required to be reported through the Construction Industry Scheme (CIS)”

What should umbrella companies and agencies be doing?

Whilst preparation for the reverse charge will not be as troublesome as expected for umbrella companies and agencies, there is still some work to be done.

We recommend that you review your contractual documentation and billing process throughout your construction labour supply chain and ensure that the supply of labour is referenced, as opposed to the supply of a construction service captured within the definition of the VAT legislation.

Who does the reverse charge apply to?

The legislation was intended to capture subcontractors or gangmasters who supply a construction service to its contractors. For example, a gangmaster has 20 individuals working for them and agrees to build an extension for a contractor. The construction of an extension to a building would be a construction service as defined in Article 5. Therefore, when the gangmaster submits their invoice to the contractor, they would need to ensure that it stated the reverse charge applies, assuming the contractor is not the “end user”.

Whilst HMRC agreed there is a risk of missing trader fraud in labour supply chains, they were tasked to look missing trader fraud with regard to suppliers of construction services only.