Hudson Contract pushes for VAT reforms to support supply chain

The company is proposing that agencies and employment intermediaries be exempted from controversial changes to the way that tax is collected.

Following the introduction of the domestic reverse charge in 2021, suppliers of construction services must report VAT but are no longer able to collect it. The measure has added to the squeeze on SMEs, which are also having to fight against soaring costs for energy, materials and labour.

Some employment intermediaries such as The Guild, Marquee and Indigo present themselves as commercial contractors to avoid agency legislation and wrongly apply the reverse charge and zero rating on new-build housing. Hudson has warned the users of these so-called ‘commercial contractors’ could be sitting on huge tax liabilities; HMRC is aware of what is going on so it is a perilous situation.

Hudson Contract is calling for agencies and employment intermediaries to be freed from the reverse charge to support cash flow through the supply chain and reduce the scope for tax avoidance.

Ian Anfield, managing director of Hudson Contract, said: “With fears of a recession and the prospect of stagflation, the government needs to do all it can to support the highly productive parts of the UK economy – namely specialist construction firms in the middle of construction supply chains.

“Back in 2019 when the domestic reverse charge was first due to be implemented, we published a survey of 1,200 SMEs showing that more than one in 10 would be unable to withstand the impact to their cash flow and nearly two thirds would experience a negative effect.

“Now it has come to pass and HMRC is well aware the reverse charge has missed its target and has caused huge cashflow problems for well-run, profitable firms. It is unlikely that HMRC will scrap the reverse charge but it could remove the exemption for labour suppliers, including employment intermediaries, from the legislation so the reverse charge runs right through. There would still be a problem because VAT needs to be paid to material and plant-only suppliers, but removing it from agencies and intermediaries would certainly help.

“Hudson Contract is proud to stand up for the interests of our 2,500 construction clients and push back against badly-designed legislation that has added extra risk and complexity to the cost of doing business in our industry.”

The company has been corresponding with senior officials at HMRC about problems caused by the structure, implementation and enforcement of the domestic reverse charge.