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HMRC Strikes at Construction Sector VAT Fraud

In its war on tax evasion and fraud, HM Revenue & Customs (HMRC) tends to focus investigations on specific trades or businesses, such as doctors, dentists or plumbers. More recently, it’s turned its attention to the construction sector, specifically businesses that supply labour. On-going investigations have highlighted a growing problem of supply chain fraud – businesses are being set up with the intention of fraudulently failing to pay VAT and making incorrect income tax deductions.

 In this blog, we provide a brief overview of the arrangements HMRC is seeking to address and the options its proposing to target and prevent them. VAT & Tax investigations are lengthy and stressful. It is also important to remember that any information uncovered by the Revenue will be passed to other investigating authorities and could lead to criminal prosecution. It is therefore imperative that anyone who finds themselves coming under the scrutiny of a revenue investigation consult specialist tax investigation accountants and solicitors as soon as possible. Please contact us for more information.

Tax Evasion in the Construction Industry

In its consultation, Fraud on provision of labour in construction sector: consultation on VAT and other policy options, HMRC identifies two principal ways that the supply of labour can result in fraud. The first involves a legitimate business with gross payment status (GPS) under the Construction Industry Scheme (CIS) being taken over. The second involves ‘a new ‘off the shelf’ company fronted by a ‘puppet’ director with a clean compliance record’, that passes the test for GPS and registers for VAT. 

Both arrangements follow a similar pattern of artificially lengthening supply chains in order to evade direct taxes by misdeclaring or not declaring CIS remissions and VAT liabilities. The aim is to delay the time it takes HMRC to identify mismatches between the main contractor’s CIS declarations with those of all the sub-contractors below it by making checks more difficult. By the time these mismatches are identified, the misdeclaring business may have folded or gone missing, while the workforce is usually moved to another business to carry on the fraud. The effect is that these businesses, and their workforce, are deliberately not paying VAT and income tax. There are also failures to make National Insurance Contributions (NICs) that create further risk of benefits fraud and illegal working. 

As HMRC notes in its consultation, ‘overall, the losses from this type of fraud are significant’. Such cases are estimated to cost the Revenue tens of millions of pounds. Although it has sought to tackle the issue by increasing its compliance response and making businesses at the top of supply chains aware of the fraud, the number of contractors often involved makes effective real time checks onerous.   

VAT & CIS Options for Tackling Supply Chain Fraud

‘HMRC is improving its compliance responses by breaking up fraudulent supply chains through civil and criminal interventions. Although effective and reducing fraud, such interventions are responses to the fraud and do not prevent it.’ 

HMRC is therefore exploring its options for stamping out missing trader supply chain fraud in the construction industry by looking to other sectors that have suffered VAT losses, such as the telecoms and energy sectors. The introduction of domestic reverse charges has proved effective at removing VAT fraud in these and other sectors. However, there are concerns that the scale of the construction industry, estimated to amount to around 250,000 VAT registered businesses and encompassing a wide variety of customers, could have a disproportionate effect on honest, small traders as well as private developers, public authorities and voluntary organisations. The consultation therefore seeks views on how best to remove additional risks and complications for both providers and customers from any VAT changes. 

HMRC is also looking at tightening the rules around GPS status and VAT registration to prevent misuse and abuse of CIS. Again, it is keen to avoid smaller sole traders or partnerships from suffering disproportionately and therefore looking to take a targeted approach. It asks, amongst other things, whether changes should be restricted to companies, or if changes should be made to the turnover test to make it more difficult for fraudsters to establish that they are a legitimate business with a trading history. It also asks if contractors or customers should be required to inform HMRC when they become aware of a change to shareholding or ownership of labour provider business. 

Our approach to Tax & Vat Investigations

Tax and VAT is a fast moving area of law that is growing increasingly important for individuals and businesses. You need proactive advice and representation, and our negotiation skills, acquired during our long history of dealing with HMRC and defending prosecutions brought by them and other agencies, give us that vital edge over our competitors. We take action to protect your interests, working with leading tax counsel and specialist tax accountants in order to give multidisciplinary advice.

Lewis Nedas Law – Specialist Tax & VAT Investigation Defence Solicitors London

Our expert Tax Investigations team has over 30 years’ experience successfully defending clients against tax fraud and financial crime allegations. We are also ranked in Chambers and the Legal 500 for the high quality of our work, and our expert solicitors are described as 'precise', 'steely determined' and 'always mindful of securing the best outcome'. Our specialist solicitors, based in the heart of London, therefore have extensive experience of preparing successful defences to tax and VAT investigations and prosecutions, whether these concern HMRC, the Crown or the SFO. For more information, please contact Jeffrey Lewis or Siobhain Egan on 02073872032 or contact us online.

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New instructions for Lewis Nedas Law specialist criminal and fraud defence solicitors

  1. cuffsLeila Abdul-Rasool has been instructed in an insurance fraud (and related money laundering matters) to the value of £500,000;

  2. Siobhain Egan has been instructed in the following matters:

    a) two more individuals seeking to overturn their convictions sustained as a result of sting entrapments by the 'Fake Sheikh' Mazer Mahmood;
    b) a professional man facing allegations of pharmaceutical fraud;
    c) a finance professional accused of fraud;
    d) two senior finance professionals acting as NED's, facing investigation by HMRC and the FCA re regulatory and professional disciplinary issues.

  3. Miles Herman is acting for:

    a) a client facing investigation into money laundering to the value of £1.5million (cross border transactions);
    b) a senior finance professional accused of illegal pornography offences.

  4. Jeffrey Lewis instructed again by a client in another complex tax evasion allegation.


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New Instructions for LNL Fraud Lawyers This Week

  • Paul Mason has been instructed in a multi-million pound fuel fraud;
  • Jeffrey Lewis is instructed in multi-million pound VAT fraud prosecution;
  • Siobhain Egan is instructed in multi-million pound charity fraud.

If you are facing an investigation or prosecution in relation to any type of fraud, contact our expert fraud lawyers on 0207 387 2032 or complete our online enquiry form here.

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