Tax threat to PFI

Customs & Excise’s latest attempt to stamp out ‘blatant’ VAT avoidance will have an unforeseen impact on companies involved in private finance initiative (PFI) projects.

New VAT rules for the construction industry, which came into effect on 1 January, are set to cost PFI roadbuilders millions of pounds in lost VAT.

The government accused accountants of helping businesses escape tax by ‘dreaming up artificial schemes’. Dawn Primarolo, Treasury financial secretary, vowed to banish further attempts at tax avoidance.

The new measure is designed to stop financial institutions, which are VAT exempt, from setting up dummy construction companies to claw back cash. Schemes were set up by accountants after Kenneth Clarke closed another loophole in his November 1996 Budget.

Constructors must now account for VAT no later than 18 months after a development is completed. Previously, they were allowed to account for tax at the time of payment or when an invoice was issued, allowing them to recover extra VAT.

But Martin Scammell, an Ernst & Young VAT partner, said that the new rules would hit innocent parties. Private-sector companies providing construction services for PFI projects stand to lose millions of pounds. ‘In a lot of cases, the VAT will not be recoverable by the Department of Transport,’ he said.

Scammell added that in 1989 Customs had encouraged companies to set up in-house construction units to deal with VAT. ‘To say they are artificial now is pretty dubious,’ he said.

A Customs spokesman said the department had acted before millions of pounds of taxpayers’ money was lost.

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