Reverse charge

Reverse charge for domestic construction services

Written by Tax Consultant, Ian MacGillivray

As from 1st March 2021, those involved in construction services in the UK will, if their services fall within the relevant criteria, have to operate the reverse charge (RC). They will have to decide whether the procedure applies. If it does, its effect is to shift the responsibility to account for VAT from the seller to the customer.


The actions you need to take are:


  • Decide if your supply is zero rated for VAT (if so it will not be subject to the RC)
  • Consider if the supply falls within the Construction Industry Scheme (if not it will not be subject to the RC)
  • Ascertain if your customer is registered for VAT in the UK (if not the service will not be subject to the RC)
  • Ask your customer if they are an “end user” as defined (broadly businesses which are registered for the Construction Industry Scheme but do not make onward supplies of the building and construction services in question); if they say they are keep their confirmation for production to the VAT authorities at a later date
  • Inform affected customers when you issue invoices to them that the RC applies
  • If they ask you what this means tell them that they have to declare the VAT as output tax (i.e. tax on sales) and, subject to the usual rules, claim back input VAT
  • Note that if any of the services in a supply are subject to the RC all other services will also be subject to it, even if that service would have been excluded if supplied on its own as a single service
  • Consider whether to switch to submitting VAT returns monthly rather than quarterly, if the change means that you have net repayments of VAT instead of having to pay VAT to HMRC


The detailed provisions of and comments on this measure are set out in an appendix to this briefing.


HMRC have said that they will operate a “light touch” approach for the first six months. However, as it is best to get things right first time, the Gravita Tax Team are available to answer any questions you may have both before and after the introduction of this major change in VAT law.



HM Revenue & Customs are introducing a reverse charge for domestic building and construction services. It will take effect from 1st March 2021. HMRC’s Guidance Note explains that the measure is in response to “organised criminal attacks on the VAT system in the construction sector”.


Under this procedure it is the customer rather than the supplier who has to account for output VAT and, subject to the usual rules, claim back input VAT in respect of the transaction(s). It will apply to building and construction services supplied at the standard (20%) or reduced (5%) rates of VAT, but not to zero rated supplies nor if the customer is not registered for VAT in the UK. Supplies to end users or intermediaries connected with end users (covered further below) do not come within the scheme. Other activities outside the régime include:


  • Drilling or extraction of oil or natural gas
  • Mineral extraction
  • Manufacturing building or engineering components or equipment, materials, plant or machinery
  • Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage sanitation, water supply or fire protection systems
  • Professional work of surveyors or of building and related consultants
  • Making, installing and repairing art works such as sculptures and murals
  • Signwriting and erecting, installing and repairing signboards and advertisements and installing seating, blinds, shutters and security systems (including burglar alarms, closed circuit television and public address systems)


HMRC give examples of when the new régime will apply. The list includes the following:


  • Constructing, altering, demolishing or dismantling buildings or structures (permanent or not) or of works forming or planned to form part of the land, such as walls and roadworks
  • Pipelines, wells, industrial plant and larger works such as reservoirs, water mains, sewers and installations for the purposes of land drainage, coast protection or defense
  • Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
  • Internal cleaning of buildings or structures if carried out in the course of their construction, alteration, repair, extension or restoration and painting or decorating the inside or the external surfaces of any building or structure


As a catch all they also add at the end of the list “services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.”


The scheme differs from the Construction Industry Scheme in that it applies to materials as well as labour. Unlike other types of reverse charge, the value of  such reverse charge services will not count towards the VAT registration threshold of £85,000.


End users are businesses, or groups of businesses, that do not make onward supplies of the building and construction services in question, but are registered for CIS as mainstream or deemed contractors because they carry out construction operations, or because the value of their purchases of building and construction services exceeds the threshold for CIS because they spend an average of more than £1 million a year on construction in any 3-year period.  Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end users.  To be so connected or linked, intermediary suppliers must either share a relevant interest in the same land where the construction works are taking place or be part of the same corporate group or undertaking as defined in section 1161 of the Companies Act 2006.  The idea is that if a number of connected businesses are collaborating together to purchase construction services, they are all treated as if they are end users and the reverse charge does not apply to their purchases. HMRC give the example of a property-owning group buying construction services through one member of the group and recharging them to either other group companies, their tenants or both. All the members of the property-owning group and their tenants will be end users and the reverse charge should not apply.


Landlords, lessors, licensors, tenants, lessees or licensees and any persons ‘connected’ to them have a relevant interest in land. Having an agreement for lease is also a relevant interest in land. However, having a relevant interest in land does not include temporary rights to occupy land to carry out building and construction services.


HMRC say that you cannot choose whether you are an end user or an intermediary supplier because it is a matter of fact.  Because it will be up to the customer to make the supplier aware that they are an end user or intermediary supplier and that VAT should be charged in the normal way instead of being subject to reverse charge, HMRC recommend that the supplier asks the customer if they are an end user or intermediary supplier and keeps a record of the answer. HMRC state that “Examples of end users include UK VAT registered mainstream or deemed contractors under CIS rules. They are typically not construction businesses and are found in the retail, manufacturing, utilities and property investment sectors as well as public bodies. Property developers should also be end users in cases where they do not make onward supplies of building or construction services.”  They also observe that “For businesses that often deal with end users, a practical way of dealing with the question of end user status is for the business to include a statement in their terms and conditions to say they will assume that their customer is an end user unless they say they are not. This places a responsibility on the customer to respond if this is not the case.”


HMRC helpfully say that they understand that that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as the business concerned is trying to comply with the new legislation and have acted in good faith. They say that correction of errors should occur “as soon as possible, as the longer under declared or overcharged sums remain outstanding the more difficult it may be to correct or recover them.” They further state that “HMRC officers may assess for errors during the light touch period, but penalties will only be considered if you are deliberately taking advantage of the measure by not accounting for it correctly.” This appears to be rather subjective and we can only hope that HMRC’s instinctive desire to levy penalties every time a taxpayer makes a mistake is curtailed.


They have provided useful flowcharts for suppliers and buyers so that businesses can determine whether or not a transaction falls within the reverse charge procedure or not.


HMRC’s guidance acknowledges that some businesses with large numbers of active contracts with subcontractors at different sites may have difficulty in assessing whether the reverse charge applies or not in the run-up to 1st March 2021 and afterwards. They are therefore allowing a broad brush approach, saying that “to avoid uncertainty and delay to payments whilst each contract is checked HMRC recognises that it will be easier if one VAT accounting treatment is given to all contracts with a particular sub-contractor.” They say that “if the contractor looks across all construction contracts with a sub-contractor and can see that reverse charge applies to more than 5% of contracts (by volume or value) with that sub-contractor, then the reverse charge may be applied to all the contracts.” However, they stipulate that for contracts starting after 1st March 2021 the contractor should decide whether the reverse charge applies from the start of the contract.


The new law provides that if any of the services in a supply are subject to the reverse charge all other services will also be subject to it, even if that service would have been excluded if supplied on its own as a single service. This means that supply and fix works will be subject to the reverse charge. HM Revenue & Customs give the example of a joiner who constructs a staircase offsite then installs it on site; he or she will be providing a reverse charge service even if the actual installation charge is only a minor element of the overall bill.


The change, say HMRC, means that “some businesses may find that, because they no longer pay the VAT on some of their sales to HMRC, they become repayment traders (their VAT Return is a net claim from HMRC instead of a net payment).  Repayment traders can apply to move to monthly returns to speed up payments due from HMRC.” Care will be needed to determine whether this move will be beneficial.


The Chartered Institute of Taxation (“CIOT”) has welcomed the decision to give construction businesses “an extra five months to prepare for a major change in accounting for VAT, because of the impact of COVID-19. Without a delay there was a risk this major tax change risks hitting SMEs the hardest at a time when they need to protect jobs and livelihoods.


“The new rules”, they say, “mark a complete overhaul of the way VAT is payable on building and construction invoices, as part of moves to reduce fraud in the sector. Under the domestic reverse charge the customer receiving the service will have to declare the VAT to HMRC in its own VAT return instead of paying the supplier. The changes only apply to supplies of building or construction services made to or received by businesses registered for UK VAT, where such a supply must be reported through the Construction Industry Scheme (CIS). Hence, it will not apply to consumers or businesses customers not meeting the reporting criteria.


“HMRC announced in June 2020 that the introduction of the domestic reverse VAT charge for construction services has changed from 1st October 2020 to 1st March 2021.


“HMRC had already pushed back the original start date of 1st October 2019 by a year, to give businesses more time to prepare. The CIOT welcomed this first delay, believing there was substantial evidence of a lack of awareness of this change, and a lack of preparedness even among those businesses who were aware of it.”


What next?

The Gravita team are available to answer any questions you may have both before and after the introduction of this major change in VAT law.


Click here to read Reverse Charge on Construction Services – Frequently Asked Questions.

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