VAT Compliance
The sector is not the problem. The evidence position is.
No construction project without a chain: general contractor, subcontractors, their subcontractors — and at the bottom, crews that can reappear on site tomorrow under a different company name. For tax purposes, construction has been a high-scrutiny field for years: sham invoices from service companies, cover invoices for undeclared wages, vanishing subcontractors. This does not put construction firms under blanket suspicion: sector risk creates grounds for scrutiny, not guilt. But a general contractor who does not document the chain will, in case of doubt, inherit its problems — in VAT, wage tax, social security and criminal suspicion.
Why this sector is under scrutiny
One particularity first, stated honestly: construction as a sector barely features in the published case list of the European Public Prosecutor’s Office (EPPO) — the EPPO is built for large-scale cross-border VAT fraud, while construction cases classically sit with Germany’s tax investigation units and the customs authority’s illicit-work directorate (FKS). That is no all-clear — quite the opposite: the mechanics of the EPPO cases are exactly the mechanics of the building-site cases.
- Services instead of goods: a carousel needs no physical goods. In the Cuba complex, courts convicted several participants in 2025 over a sham-invoice carousel built on VoIP services — damage around €100 million. What works with telephone minutes works even better with construction services: invoices for work that is hard to verify physically.
- Corporate webs without substance: in June 2026 the EPPO searched a Paris network of 26 service and trading companies — around €13 million in alleged damage, payment flows of roughly €160 million through more than 80 accounts in under two years. In the Kingdom case, €13.7 million in refunds was paid out on entirely fictitious claims — no real goods at all.
- Front directors: the Emily case (March 2026) shows companies run through front directors from Bulgaria, Hungary and Poland — the same pattern known from service companies in the construction sector.
- The purchasing flank — fuel: anyone running a vehicle fleet and site machinery buys diesel, and diesel is an EPPO priority: Fuel Family (up to €300 million, seizures including more than 150 properties) and Water into Wine (€66 million in VAT plus over €137 million in energy duty; indictments in Magdeburg and Berlin in 2026, eleven further arrests in June 2026). Conspicuously cheap fleet diesel can originate from such chains.
At the end of 2025 the EPPO reported 981 VAT and customs fraud investigations worth around €45 billion in estimated damage. Germany’s national audit density in construction comes on top.
The typical constellations
The service company with cover invoices. A “subcontractor” without staff or equipment delivers invoices, not work; what is really paid is undeclared wages. For an honest principal, every invoice from such a source becomes a risk: there is no input VAT from sham invoices, and whoever “should have known” faces Section 25f UStG, liability and criminal suspicion.
The cascade with a vanishing base. Multi-tier subcontracting chains whose bottom level ends in serial insolvency or company burial. Taxes, social contributions and wages remain unpaid — and the search then turns to the solvent general contractor.
The Section 13b attribution trap. For construction services between construction businesses, the recipient owes the VAT (Section 13b(2) no. 4, (5) UStG; evidenced by the USt 1 TG certificate). Misjudging that status produces back taxes and Section 14c exposure — without any fraud. And as everywhere: the reverse charge does not immunise against the chain allegation of Section 25f UStG.
Bogus self-employed crews. A works contract on paper, de facto labour leasing — with consequences in wage tax, social security and criminal law.
Your red flags
- Subcontractors without own staff, equipment or a responsible site manager — yet with capacity for every trade
- The Section 48b EStG exemption certificate is missing, expired or was never verified with the Federal Central Tax Office
- Unclear Section 13b status: no USt 1 TG certificate, invoicing switching between net and gross
- Serial companies: young entities, changing names, identical crews and contacts (the front-director pattern)
- Lump-sum invoices without measurement records, timesheets or site-diary reference
- Offer prices below any serious wage calculation; cash or kick-back arrangements
- Conspicuously cheap fleet or site fuel from unknown sources
What affected businesses should do now
If a subcontractor in your chain becomes subject to proceedings, the buffer perspective applies: you are not answerable for its business model — you must show your selection and monitoring diligence. Secure, per project, the contracts, measurement records, site diaries, photo documentation, timesheets, Section 48b verification protocols, USt 1 TG certificates and payment routes; do not produce retrospective bulk “documentation”; address correction questions only with advice. The standard comes from supplier due diligence with the red-flag catalogue, the evidence structure from the seven building blocks of Proof of Check. And because in construction the office quickly becomes personal: managing director liability under Sections 69, 34 AO and D&O and criminal defence cover.
FAQ
Our subcontractor has vanished into insolvency — do we now lose input VAT and become liable?
Not automatically. A counterparty’s failure is no proof against you. It becomes critical only where objective circumstances are said to show that you knew, or should have recognised, the sham structure — and the authority must prove that. Your documented selection checks and the performance records per project are the counter-evidence.
Does the Section 48b EStG exemption certificate protect us?
It is a mandatory checkpoint, not a free pass: without a valid certificate you must withhold 15 per cent construction withholding tax; with it, the withholding lapses — but neither the VAT questions nor the diligence questions do. Verify the certificate with the Federal Central Tax Office and document that check with a date — as one building block, not a substitute for your evidence architecture.
What do investigators typically examine first at general contractors?
Recurring patterns: the substance of subcontractors (staff, equipment, site management), measurement records and site diaries against invoice totals, payment routes and reflows, the Section 13b treatment, Section 48b verifications, serial incorporations in the vendor base. Your own check architecture should address and document exactly these points per project, in advance.
Let us talk about your subcontracting chain — a free 15-minute consultation: You describe. We assess. You know where you stand. → Confidential first assessment
Start the VAT CMS quick scan — ten questions, one traffic-light result: where does your evidence architecture stand today? → Quick scan
Acutely affected?
Unannounced inspection, dawn raid or liability notice: emergency — the first 72 hours or call the emergency line directly.