Construction firms have been warned against using payroll companies that misrepresent themselves as 'commercial contractors' to avoid charging VAT after a tax tribunal reinforced key legal principles applying to fraud in supply chains.

Eurolaser IT's unsuccessful appeal against HMRC confirmed that even if company directors had no knowledge of VAT issues, businesses can still be held liable for unpaid VAT in their supply chain. The Berkshire-based company faces a £2.4 million tax bill plus penalties and HMRC's legal costs after the tribunal ruled that companies remain responsible for VAT compliance throughout their supply chains.

The Eurolaser case hinged on what the directors ‘should have known’ and the fact that a rogue consultant had been given the autonomy to use suppliers involved in VAT fraud without any due diligence. In construction VAT avoidance cases, HMRC’s job would be far easier. An increasing number of construction firms knowingly sign contracts that fraudulently describe payroll companies as providing ‘construction services’ to avoid paying VAT when it is obvious they do not.  

In another recent case, a Sheffield payroll director has been banned for eight years after his company, Remedy Payroll Solutions Ltd, went into liquidation owing £2.5 million in unpaid VAT. The company significantly under-declared its VAT liabilities between 2020 and 2021, claiming it owed just over £250,000 when HMRC investigations revealed the actual amount exceeded £2.5 million.

Ian Anfield, managing director of Hudson Contract, said: “These cases demonstrate HMRC's intensified focus on VAT compliance in the construction sector. The Eurolaser case clearly establishes that ignorance is no defence when VAT fraud exists in your supply chain, while the Remedy case shows HMRC's determination to pursue directors of non-compliant payroll companies. 

“Construction firms must perform proper due diligence on their payroll providers. If you're not being charged VAT when you should be, if unrealistic credit terms are offered or the low fees look too good to be true, you're likely exposing yourself to significant financial risk.

“Construction firms should verify payroll providers' VAT status and then use professional advisors to question contractual arrangements where agencies or payroll providers seek to apply the domestic reverse charge to avoid VAT.”