Autumn Budget 2018 announced a new measure, designed to counter fraud in the construction industry, which has seen gangs of criminal traders artificially extending the chain of supply of labour services, then failing to account for all the output VAT due to HMRC by collecting the VAT on the supplies (sales) and then going "missing" before passing the VAT on to HMRC.

The proposed change, which is scheduled to take effect from 1 October 2019, will mean that for certain specified supplies of construction services, the customer will be liable to account to HMRC for the VAT in respect of those purchases rather than the supplier (this is commonly known as the 'reverse charge'). The reverse charge will apply through the supply chain where payments are required to be reported through the Construction Industry Scheme (CIS) up to the point where the customer receiving the supply is no longer a business that makes supplies of specified services - these businesses are referred to as 'end users'.

The reverse charge will exclude businesses that supply specified services to connected parties within a corporate group structure or with a common interest in land. In these circumstances, the supplies in question will then revert to normal VAT accounting rules.

The VAT treatment of construction services supplied to unregistered customers will remain the same. So, in such cases, the supplier will retain responsibility for charging VAT and accounting for it to HMRC.

HMRC estimate that this measure will impact on up to 150,000 businesses in the construction and building sector. However, the draft legislation was revised at draft stage to ensure that the reverse charge will only apply where the payment for the supply needs to be reported for CIS purposes. This will automatically remove many end users from its scope without the need for further consideration.

There is one area in particular where this change may cause problems. The receipt of reverse charge supplies is treated as part of a person's taxable turnover for the purposes of the VAT registration threshold. This means that receiving certain supplies from 1 October 2019 could result in a trader, whose sales were previously below the threshold, becoming liable to register for VAT. In the Budget, the Chancellor confirmed that this treatment could be disapplied in relation to any specified VAT reverse charge if HMRC deem it necessary. Any affected businesses should, however, proceed with caution.