Indirect Tax News - October 2021

Domestic reverse charge VAT introduced for construction services

The UK introduced significant changes to the way that VAT is collected in the construction industry on 1 March 2021. As from that date, VAT-registered recipients of specific types of building and construction services—rather than the suppliers—are required to pay the VAT due on the supply directly to the UK tax authorities (HMRC) under a domestic reverse charge mechanism. HMRC has issued helpful guidance on obligations under the reverse charge.


The reverse charge VAT aims to combat missing trader fraud in the construction sector in a manner similar to the previously introduced domestic reverse charges for the sale of computer chips and mobile phones.

Under the reverse charge rules, a VAT-registered business that supplies certain construction services to another VAT-registered business for onward sale must 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 the 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 relevant construction reverse charge services will not count towards the VAT registration threshold, which is good news for smaller businesses.

Applicable services

The domestic reverse charge applies to supplies of “specified services” between VAT-registered businesses where the recipient then makes an onward supply of the services. Specified services are generally those defined as construction operations for purposes of the construction industry scheme (CIS). 

The domestic reverse charge applies to a broad section of businesses involved in property development, even those that may not typically consider themselves to be construction companies. Relevant services include construction, alteration, repair, extension, painting and decorating, building demolition, civil engineering and the installation of heating, lighting and air conditioning. The legislation is designed so that if there is a reverse charge element in a supply, the whole supply is subject to the domestic reverse charge (but see below for an exception). 

Where specified services have been provided, subsequent services on the same site by the same supplier may also be covered by the domestic reverse charge, if both parties agree. This rule is designed to speed up the decision-making process on whether the domestic reverse charge should apply. However, where the original services did not fall within the scope of the domestic reverse charge but subsequent services do, the VAT treatment changes; therefore, businesses have to review and monitor the VAT position throughout a project.

The domestic reverse charge applies to specified services unless:

  • The services are supplied to an end user, such as the property owner, or directly to a main contractor that sells or lets a newly completed building;
  • The recipient makes onward supplies of the construction services to a company connected with the end user;
  • The recipient is not VAT-registered or required to be VAT-registered;
  • The recipient is not registered for the CIS;
  • The supplier and recipient are landlord and tenant or vice versa; or
  • The supplies are zero-rated.

An “end user” is a person who receives the specified services for any purpose other than making an onward supply of the services. Where the customer has not provided confirmation that it is an end user either in writing or in the contract, HMRC’s guidance is that the supply will fall within the scope of the domestic reverse charge and no VAT is charged. HMRC has indicated that a customer can “opt” not to be treated as an end user. While this could create a significant cash flow advantage for the customer, it is not specifically reflected in the legislation or the HMRC guidance and, therefore, a customer should proceed with caution, obtain professional advice and, if appropriate, request a ruling from HMRC before adopting this position. In addition to confirming whether a customer is an end user, a supplier should require the customer to confirm its VAT and CIS status and provide its VAT number, preferably in the contract before any invoices have to be issued.

Recipients of construction services that are not currently deemed contractors for CIS purposes also need to be aware of changes to the CIS rules because more businesses may be within the scope of CIS and, therefore, potentially have to apply the domestic reverse charge.  

Where goods and building materials are provided together with construction services and in the course of the construction work, the reverse charge applies to these goods. There likely will be cases where it is difficult to determine if there is a separate supply of goods that is excluded from the reverse charge, or whether they are to be included as part of a single supply of construction services. In these cases, a business must consider the position further to ensure the correct VAT treatment.

Where the reverse charge would ordinarily only apply to 5% or less of the value of the whole supply, it may be possible to disregard the reverse charge and apply the normal VAT rules.  


Invoices for services subject to the domestic reverse charge must include all information required on a normal VAT invoice, including how much VAT is due under the reverse charge or the rate of VAT if the VAT amount cannot be shown. However, it must be clear that the domestic reverse charge applies and that the customer is required to account for the VAT. There is no specific required wording, but HMRC provides examples in the guidance.

Impact on construction businesses

The administrative and financial consequences for businesses affected by the domestic reverse charge require careful management.

Construction businesses should consider taking steps to ensure their accounting systems are capable of processing reverse charge supplies and make ongoing checks to ensure that supplies and purchases are correctly treated. As the VAT amount must still be shown on invoices subject to the domestic reverse charge, there is a risk that suppliers will account for the VAT to HMRC in error and customers will recover it from HMRC. 

Subcontractors that relied on VAT collected from their customers as working capital until they have to remit it to HMRC are likely to suffer from the loss of cash flow. These businesses and even their customers should consider whether payment terms need to be revisited to avoid problems in the supply chain.

Subcontractors should also confirm that they are working for a VAT-registered business and whether they are working for an end user or for someone connected to an end user, including landlords and tenants.

Construction businesses should consider the following:

  • Reviewing supplies made to and received from other VAT-registered contractors to establish where these supplies will be subject to the reverse charge;
  • Obtaining confirmation from customers that they are an end user and their VAT registration and CIS status;
  • Assessing the cash flow impact of the domestic reverse charge and whether any negative impact can be mitigated;
  • Determining whether it is appropriate to move to monthly VAT returns if the business is no longer a net payer of VAT;
  • Determining whether it is appropriate to arrange for suppliers to purchase goods and materials where their services fall under the reverse charge to alleviate the need to fund VAT payments on the goods and materials.

Richard Dalton