Hudson Contract is warning construction companies to beware payroll companies calling themselves commercial contractors and falsely promising protection against forthcoming changes to VAT.

Known as the domestic reverse charge, the new procedure will apply to most supplies of building and construction services from March 1. It means that contractors working for end clients will continue to charge and collect VAT while the CIS-registered subcontractors beneath them will report the tax but be unable to collect it. Plant only, material and labour only providers are exempt and must continue to collect VAT in the normal way.

Hudson said a growing number of labour providers are dressing themselves up as ‘commercial contractors’ to try to win business from unsuspecting building firms by saying they don’t need to charge VAT.

Ian Anfield, managing director, said: “The generic commercial contractor model has become popular with CIS payroll firms as it helps them avoid agency legislation which is bad enough, but now using it to avoid VAT as well will expose their clients to huge VAT liabilities and potentially unpaid employment taxes.”

Mr Anfield, a foremost authority on employment and tax matters in the construction industry, is presenting a webinar with the Chartered Institute of Building on the domestic reverse charge and what it entails for supply chains. The free event takes place at noon on 9th February.

HMRC designed the procedure to combat criminal fraud in the VAT regime but critics including Hudson have claimed it will favour main contractors at the expense of SMEs. The government has twice delayed implementation, first due to Brexit and then the pandemic. Trade federations are now calling on the Chancellor to scrap it altogether.

Mr Anfield added: “There is never a good time to introduce bad legislation. It was designed as an anti-fraud measure but we have ended up with bad legislation which misses the mark and is disproportionate to the size of the problem.

“We are ready and willing to help building firms understand how DRC affects them, and how to safely navigate the new rules.”