Construction sector faces VAT reverse charge

The government has published draft legislation detailing a new VAT domestic reverse charge for certain building and construction services, which will take effect from 1 October 2019 and is designed to clamp down on missing trader fraud

The measure was first outlined at Budget 2018 and is expected to protect £495m of tax over the next five years.

Under the new rules, for certain supplies of construction services (‘specified services’), the customer will be liable to account to HMRC for the VAT in respect of those purchases rather than the supplier.

The ‘reverse charge’ will apply through the supply chain where payments are required to be reported through the construction industry scheme (CIS) up to the point where the customer receiving the supply is no longer a business that makes supplies of specified services - these businesses are referred to as ‘end users’. The reverse charge will also include goods, where those goods are supplied with the specified services.

It will exclude businesses that supply specified services to connected parties within a corporate group structure or with a common interest in land. In these circumstances, the supplies in question will then revert to normal VAT accounting rules.

The introduction of a reverse charge does not change the liability of the supply of the specified services. What does change is the way in which the VAT on those supplies is accounted for. Rather than the supplier charging and accounting for the VAT, the recipient of those supplies accounts for the VAT.


The types of construction services covered by the reverse charge are based on the definition of ‘construction operations’ used in CIS under section 74 of the Finance Act 2004 but will only apply to supplies where payments are required to be reported for CIS purposes under regulation 4 of the Income Tax (Construction Industry Scheme) Regulations 2005.

Therefore supplies between sub-contractors and contractors, as defined by CIS, will be subject to the reverse charge unless they are supplied to a contractor who is an end user.

End users will usually be recipients who use the building or construction services for themselves, rather than sell the services on as part of their business of providing building or construction services.

The statutory instrument excludes certain types of supplies of services. This is also based on CIS definitions under section 74 of the Finance Act 2004. These are customers that have to report their payments for specified supplies through CIS but do not make supplies of specified services themselves.

Also excluded are supplies of specified services where the supplier and customer are connected in a particular way, and for supplies between landlords and tenants. The meaning of connected is defined in the statutory instrument and only applies where the customer is an end user and the supplier is part of that customer’s corporate group.

Unlike for CIS, there will be no deemed contractor provisions whereby purchases become subject to reverse charge because the purchaser buys a certain amount of such purchases in a given period.

Where a VAT-registered business receives a supply of specified services (which are not excepted supplies) from another VAT-registered business on or after 1 October 2019, it accounts for that VAT amount through its VAT return instead of paying the VAT amount to its supplier. It will be able to reclaim that VAT amount as input tax, subject to the normal rules. The supplier will need to issue a VAT invoice that indicates the supplies are subject to the reverse charge.


In its policy document, HMRC says the introduction of the reverse charge in this business sector will mean that businesses will need to adapt their systems and manage their cash flow differently. Due to the large number of small businesses potentially affected the government has given a long lead-in time.

In addition, in order to minimise the impact on the smallest businesses, provision has also been made in the draft legislation  to modify the effect of the rule in section 55A(3) of the Act (reverse charge supplies to be treated as supplies made by the recipient for the purposes of the VAT registration limits). For construction services, therefore, the aggregation rule in section 55A(3) will not apply.

HMRC also says it will apply a light touch in dealing with related errors that occur in the first six months after introduction, where businesses are trying to comply with the new legislation. However, businesses that knowingly claim end user status when the domestic reverse charge should have applied will still be liable for the output tax that should have been paid and may be liable for penalties.


The guidance sets out the scope of services which will be subject to the new reverse charge regime, and those which will be exempt if supplied on their own.

The legislation is designed so that if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge. This is to make it simpler for both supplier and customer and to avoid the need to apportion or split out the supply.

In addition, if there has already been a domestic reverse charge supply on a construction site, if both parties agree, any subsequent supplies on that site between the same parties can be treated as domestic reverse charge supplies. HMRC says this should reduce doubt and speed up the decision making process for both parties.

The guidance states that because suppliers may be unaware they are supplying an end user, it will be up to the end user to make the supplier aware that they are an end user and that VAT should be charged in the normal way instead of being reverse charged. This should be in a written form that is clearly understood and can be retained for future reference.

The tax points are e the issue of a VAT invoice or the receipt of payment, whichever is earlier (Regulation 90 of the VAT Regulations 1995). Additionally, in certain circumstances, where there is a delay beyond one year in issuing a VAT invoice or receiving payment, an annual tax point will apply (Regulation 94B(5) of the VAT Regulations 1995).

For supplies spanning 1 October 2019 that are liable to the domestic reverse charge, for invoices with a tax point before 1 October 2019, the normal VAT rules e will apply; for invoices with a tax point on or after 1 October 2019, the domestic reverse charge will apply.

Policy paper VAT reverse charge for building and construction services

VAT reverse charge for building and construction services guidance note

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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