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Domestic Reverse Charge – Construction Industry

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Back in 2019 before any of us had heard of Covid, HMRC announced that they were introducing the Domestic Reverse Charge for VAT and that it would affect everyone in the Construction Industry who is VAT registered.

After delaying the introduction of this a couple of times due to Brexit and Covid it has finally been announced that it is being introduced on 1st March 2021 so if you are VAT registered and work within construction you need to know about it.

What is the Reverse charge ?

The reverse charge rules often cause confusion. In brief the customer accounts for output tax in box 1 of their VAT return, based on a VAT exclusive invoice received from a supplier. If the supplier does not charge VAT in the first place, and is not therefore paid VAT, he cannot pocket the VAT money and disappear without paying it to HMRC.

Builders selling services

So when you undertake work for someone within the construction industry you have five key questions to ask.

If the answer to the first four questions is ‘yes’ and ‘no’ to the final question, the reverse charge will apply and no VAT will be charged on sales invoices raised for the job in question, and the customer should account for VAT instead.

  1. Is the customer registered for the Construction Industry Scheme (CIS)?

If you are a sub contractor performing services for a contractor builder then the answer would be Yes.

If the customer is a private individual then the answer is NO and the builder doesn’t need to worry about the reverse charge rules and just applies the normal rules for charging VAT.

2. Is the customer registered for VAT?

This can be confirmed using HMRC’s new VAT number checker service and I would suggest that builders use it every time.

The worst-case scenario is for a builder not to charge VAT on a job that should have been subject to normal VAT rules as HMRC may well raise a VAT assessment for the underpaid output tax. This could be very expensive as there is no way of claiming it back if a mistake is made.

3. Is the work within the scope of the CIS?

Traditional building services are obviously all included under the CIS, such as electricians, plumbers, bricklayers, decorators, carpenters etc. If in doubt you must refer to the useful HMRC guidance on the CIS.

4. Is the work subject to either 5% or 20% VAT?

Any zero-rated sales are excluded from the new Domestic Reverse Charge, for example construction work on new dwellings.

5. Is the customer an end user or intermediary supplier for the work?

The Domestic Reverse Charge will only apply if the customer makes an onward supply of construction services to their own customer: ie the typical subcontractor, contractor and customer arrangement.

For example where the sub contractor is VAT registered and they undertake work for a contractor who ultimately works for the end user customer.

In cases where the contractor is not supplying on the construction services, the work is excluded from the reverse charge. This can happen where:  

The customer is an ‘end user’

This would be relevant if, for example, a bricklayer carried out work at the head office of his builder customer, or perhaps at a property that the customer owns and rents out. In other words, the service is not supplied on by the builder receiving the bricklayer’s services.

The onus is on the customer to tell the bricklayer if it is an ‘end user’ for any job. If so, VAT will be charge in the normal way by the bricklayer.

The customer is an ‘intermediary supplier’

This is a business that is registered for both CIS and VAT that is connected or linked to end users. The connection is based on s1161 of the Companies Act 2006 (ie, the two entities are in the same corporate group or undertaking).

A link exists if both the intermediary supplier and the end user have a relevant interest in the same land where the work is taking place (eg, a landlord and tenant arrangement). So, even though the intermediary supplier is making an onward supply of construction services to the end user, the supplies it receives from other builders, such as my imaginary bricklayer, will be subject to normal VAT rules rather than the reverse charge.  

So what do you need to do?

Supplier checks

A builder selling construction services must first be sure that his customer is both CIS and VAT registered.

A potential difficulty is when the customer is in the process of applying for a VAT number from HMRC. In this situation, you should consider the advice given in VAT Notice 735, which is to request a 20% advance deposit from the customer to cover the potential output tax liability if things go wrong.

The HMRC guidance advises: “Any deposit taken in these circumstances can be refunded when they can show evidence that they’ve got their VAT registration number.”

Customer checks

The challenge here is to make sure that reasonable steps have been taken to check a customer is bona fide. A lot of this process comes down to common sense and if you are undertaking business with a new customer, a due diligence process should have been carried out as part of the commercial decision to take on that customer.

HMRC has confirmed that a builder who has been deliberately misled by a customer but has taken reasonable steps to check their credibility will not be held responsible for underpaid output tax.

Three points to remember

There are three priorities for those who are buying in building services from March onwards.

Incorrectly charged VAT

Make sure that you are not charged VAT by a builder when the reverse charge should apply. You can still claim input tax in Box 4 but HMRC has the power to assess output tax for the same amount, as if the reverse charge had been carried out correctly. 

Nature of work

Check that the work comes within the scope of the CIS and that the supplier is providing building services, but is not an employment business which is only making a supply of staff rather than construction services. Supplies by an employment business are subject to normal VAT rules.

End user or intermediary supplier

The final check is for customers to advise their builders before work starts if they qualify as either an ‘end user’ or ‘intermediary supplier’ for any of the work in question, as I explain above.


HMRC have produced two very helpful flowcharts for builders and you can download a copy here:

Suppliers Flowchart

Buyers Flowchart