QE Tax Flash: Spotlight on the Construction Industry

HMRC has strengthened its enforcement powers in the construction industry by distributing responsibility for tax fraud throughout the industry’s supply chain. 

What is new? From Monday 6 April, HMRC has the power to strip businesses of ‘Gross Payment Status’, which allows them to receive construction contract payments without deduction, make the end user liable for any lost tax, and apply a penalty of up to 30% of the lost tax on the business or directors personally if they “knew or should have known” that fraud was taking place anywhere in their supply chain. The introduction of the  “constructive knowledge test” has historically given rise to a significant number of tax disputes: companies have to prove absence of knowledge of fraud. 

What does it mean? For any business in a construction supply chain, it is now critical to demonstrate that the company has taken reasonable steps to identify risks, followed up, and documented those actions.

Liesl Fichardt: “HMRC is no longer content to pursue the party that failed to pay the tax. It is now pursuing everyone who was in a position to prevent that failure. That is a fundamental shift in the enforcement philosophy and should not be overlooked.”

Emily Au: “The disputes pipeline from these changes will be significant, and the documentary record you maintain now will determine whether you can defend your position later.”

Julius Berling: “The ‘knew or should have known’ test has generated extensive litigation in VAT and other contexts. The early cases will be closely watched, to see how far HMRC will push the test’s boundaries in the CIS context.”