Budget 2018: VAT fraud initiative means that if you’re CIS registered, you need to take action soon

Chancellor Philip Hammond’s new initiative to tackle VAT fraud seems destined to cause confusion.  That’s the verdict from Hudson Contract Managing Director Ian Anfield, who says: “Make no mistake, the announcement on reverse charging VAT is going to be disruptive for every CIS registered firm in the country.

“Yes, we need to tackle VAT fraud among rogue labour providers who are stealing an estimated £100 million of government money every year.  But these changes seem more like a blunt instrument than an effective solution.  I predict major confusion and potential cashflow issues for firms that are CIS registered but use lots of non CIS VAT registered suppliers.”

It’s estimated that as many as 150,000 building firms will need to change their accounting systems, and HMRC has already acknowledged the administrative burden is expected to be ‘significant’.  Broadly speaking:

• Firms making payments within CIS contracting chains will no longer collect VAT
• All apart from the contractor who deals with the organisation at the top end of the chain will report VAT – but no money will pass through their hands

The new rules are set to come in on 1^st October 2019.  Ian Anfield adds:  “Firms should speak to their accountants or auditors to get ready for changes to their accounting systems.  If you’re affected, you’re probably going to have to sort out new software to ensure you don’t make costly mistakes with your invoices.  And if your business currently relies on ‘VAT loans’ to keep itself ticking over, you need to forward plan for the likelihood of reduced cashflow.  And if you’re a larger business at the top of the supply chain, it’s probable you’re going to be involved in a degree of squabbling as to which companies actually have to pay the VAT.

IR35 CLAMPDOWN

“The budget also announced an IR35 clampdown that will affect firms that use consultants who trade via Personal Services Companies, or PSCs,” Ian Anfield continues. “This is irrelevant to the vast majority of freelance builders who operate as sole traders.  But construction firms that use self-employed consultants such as senior QSs, planners, buyers, commercial managers, estimators and others who sit outside CIS and provide their services via PSCs will need to rethink their contractual arrangements.”

Until now, operating as a PSC has shielded the end user – i.e. the construction firm – from status challenges, but the change will shift liability for organisations using PSCs with any shortfall in employee and employer’s taxes. 

“The first step in being ready, is to draw up a list of consultants who operate via PSCs and look at whether or not they would look like employees if not for the presence of their limited company,” Ian Anfield advises.  “This is an area where Hudson Contract already has experience and expertise, so if you are unsure about your potential risks and liabilities, please get in touch with me

MAKING TAX DIGITAL

Although not mentioned directly in the budget, Making Tax Digital is definitely coming. The good news is that it has no bearing on employment status or the use of labour-only subbies.

“Eventually, HMRC would like every company to be visible to them online with all transactions traceable,” Ian Anfield says.  “There are timescales for firms to lodge digital accounts based on size. So it’s worth checking with your financial people to see if there’s already a date for your firm to comply.”