Preparing for the introduction of the domestic reverse charge for building and construction services

9 Feb 2021

Having been delayed twice, the reverse charge system is due to be implemented within the building and construction sector on March 1st 2021. 

The aim of this measure is to tackle missing trader fraud in the construction sector.

Under the new regime, a VAT-registered business supplying certain construction services to another VAT-registered business for onward sale, will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge. However, it is the recipient that must account for the VAT due on that supply through its VAT return, instead of paying the VAT amount to the supplier. The recipient may recover that VAT amount as input tax, subject to the normal rules.

Unlike other types of reverse charge the value of such reverse charge services will not count towards the VAT registration threshold, which is good news for smaller businesses.

HMRC states the VAT reverse charge for construction doesn’t apply to subcontractors unless the answer to all of the following questions is yes:

  • Are any of the supplies you are making within the scope of the CIS?
  • Is the supply standard or reduced-rated rather than zero rated?
  • Is your customer VAT registered?
  • Will your payment be reported under CIS?
  • Are you sure the customer is not an end user?

 If the reverse charge isn’t applicable to the services a subcontractor provides then normal VAT rules apply – you should invoice for the VAT and account for it in your VAT Return.

What construction services does the VAT reverse charge apply to?

The reverse charge applies to the following, with the inclusion of any services that form an integral part of the items below, or are preparatory to them, or are for rendering them complete (for example, site clearance or earth-moving excavation):

  • construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations
  • construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
  • installation in any building or structure of systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
  • internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
  • painting or decorating the internal or external surfaces of any building or structure

The reverse charge applies to the services listed above plus any construction materials used directly for those services.

What preparatory work do businesses in this sector need to be carry out?

  • Suppliers need to check whether their customer has a valid VAT number together with their CIS registration status.
  •  Contracts need to be reviewed to ascertain whether the reverse charge will need to be applied
  • Accounting records need to be able to record reverse charge transactions. Make sure that you download any available updates to your accounting system to ensure you have the relevant software in place to deal with the new domestic reverse charge rules and inform all staff who are responsible for VAT accounting about the changes and engage in training if necessary. 
  • Invoices will need to show the correct information so that customers know whether they need to use the reverse charge or not. Please see below.
  • Come off the Cash Accounting Scheme if t supplies fall under the domestic reverse charge
  • Review the suitability of the Flat rate scheme for your business

There will be an impact on cash flow where a business was previously receiving regular payments of VAT on invoices issued and its supplies now fall to be treated using the reverse charge.  It may be that some businesses will now be regularly in a repayment position when they submit their VAT returns. Such businesses should consider switching to monthly VAT returns.

Customers will now have to check whether their supplier is VAT registered and inform them in writing if they are exempt from the reverse charge because they are an end user or intermediary. They may also need to know how to account for the reverse charge on their VAT returns.


Invoices for services subject to the domestic reverse charge must include all the information required on a normal VAT invoice together with how much VAT is due under the reverse charge or the rate of VAT, if the VAT amount cannot be shown. They must make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT. There is no mandatory wording but HMRC provide examples of suitable wording:

“Reverse charge: VAT Act 1994 Section 55A applies”

“Reverse charge: S55 VATA 94 applies”

“Reverse charge: Customer to pay VAT to HMRC”

Where customers issue authenticated tax receipts or self-billing invoices HMRC’s recommended wording is:

“Reverse charge: we will account for and pay the output tax due to HMRC” 

“Reverse charge: as the UK Customer we will pay the VAT due to HMRC”

Important points to note

The reverse charge and CIS are different animals. If a contract is for supply and fix, the reverse charge applies to the full value, even if the materials and labour are separately invoiced.

Contracts may be for a mix of services, some falling within the reverse charge, some not. The example provided by HMRC is of a joiner who constructs a staircase off site, (this would not be subject to the reverse charge) and then installs it (subject to the reverse charge). The part subject to the reverse charge can be disregarded if it is less than 5% of the overall charge.

If you are unsure if you will be affected by the domestic reverse charge, or have any queries in relation to the changes, please contact Gill Yates