Reverse charge VAT for construction services

Scope of this note

The reverse charge is a mechanism to prevent the avoidance of value added tax (VAT) by suppliers who charge and collect VAT from the recipient but fail to account for that VAT to HMRC (for example, missing trader fraud). The reverse charge shifts the responsibility for accounting to HMRC for VAT from the supplier to the recipient of the supply.

In broad terms, the VAT reverse charge will apply to business to business supplies of construction services (the same services that are caught by the Construction Industry Scheme (CIS) for direct tax purposes) where the recipient is not the final consumer. This note explains how the VAT reverse charge works, examines which construction services are subject to the new rules and which are excepted, and sets out various administrative and practical considerations.

HMRC published an overview guidance note on the construction services reverse charge on 7 November 2018 (see HMRC: VAT reverse charge for building and construction services guidance note) (HMRC overview note). More detailed guidance, which includes a flowchart to check if the reverse charge applies, was published on 7 June 2019 (see Legal update, HMRC guidance on VAT reverse charge on construction services) (HMRC detailed note). HMRC has also published guidance on the domestic reverse charge procedure (see HMRC: Domestic reverse charge procedure (VAT Notice 735) (VAT Notice 735), although this guidance has yet to be updated to reflect the application of the domestic reverse charge to construction services.

Normal VAT rules and construction services

Under the normal VAT rules: 

  • VAT output tax is chargeable on the supply of goods or services made in the UK by a taxable person in the course or furtherance of their business (section 4VATA 1994).
  • The supplier is liable to account to HMRC for any output tax due on supplies of goods and services (section 1(2)VATA 1994).

VAT rate

Not all supplies of goods and services attract the same VAT liability.

The rate of VAT chargeable on the supply of construction goods and services depends on the nature of the supply. It can be: 

Single or multiple supplies

A single transaction can often comprise two or more separately identifiable elements. For example, the supply of construction services and building materials. Different elements of the supply may be chargeable at different VAT rates.

Case law has determined the principles that should be applied to determine the VAT liability of a transaction that comprises elements that would attract different VAT liabilities if they were separate supplies. Specifically, the courts have determined that there is a single supply if one or more elements constitute the principal service, while one or more elements are ancillary and multiple supplies where the essential features of the transaction confirm that the supply is of several distinct principal services.

Tax point

The time of the supply (tax point) for the supply of construction services is completion of performance of the services unless the supply is a continuous supply (services supplied both for a period and under terms providing for the consideration to be determined, or payable, periodically or from time to time), in which case the tax point is the earlier of receipt of payment and the issue of a tax invoice.

Reverse charge on construction services

For supplies that meet the conditions set out below, the normal VAT rule that the supplier charges and accounts for VAT is modified so that the recipient of the supply is required to account for VAT to HMRC instead.

The conditions are as follows:  

  • taxable person supplies construction services (alone or together with goods supplied in a single supply) that are not excepted supplies.
  • The recipient is a taxable person at the time the supply is made, and the supply is made in connection with the recipient’s business.
  • It follows that supplies to businesses that are not VAT registered (or liable to be registered) or to customers for non-business use are not caught.
  • The supplies are taxable at the standard or reduced rates.
  • Zero-rated supplies of goods or services are outside the scope of the reverse charge. Supplies that are eligible for zero-rating are set out in Schedule 8 to VATA 1994. This includes the supply of any services (other than an architect, surveyor or any person acting as a consultant or in a supervisory capacity) related to the construction of a building and associated supplies of building materials incorporated into a building (or its site) in the course of construction of a building either designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose. (Items 2(a) and 4, Group 5, Schedule 8, VATA 1994.)
  • It follows that the supply of construction services to the main contractor that sells a newly built dwelling to a customer is not caught by the reverse charge.

Construction services

The definition of construction services is substantively the same as the definition of construction operations used in the context of the CIS. Accordingly, the following (among other things) are construction services: 

  • Constructing, altering, repairing, extending, demolishing and dismantling of buildings, structures and works forming (or to form) part of the land such as walls, roads and power lines.
  • Installing heating, lighting, air-conditioning, drainage and other systems.
  • Painting or decorating the outside or inside of a building.
  • Preparatory work such as cleaning, site clearance, earth-moving excavation, laying foundations and erecting scaffolding (with labour).

It follows that if a supplier’s services are caught by CIS rules, the supplier will need to consider if its supplies are subject to the reverse charge.

HMRC guidance lists the services that are within the scope of the reverse charge (see HMRC detailed note: Services that are affected by the domestic reverse charge). It has also published guidance on what it considers to be construction operations for the purposes of the CIS rules. As the definitions of construction operations and construction services are substantively the same, it follows that this guidance will apply equally to construction services.

Goods supplied with construction services

Goods (materials) supplied with construction services, which fail to be treated as part of a single supply of services, are also subject to the reverse charge. This is an extension to the government’s original proposal, which was to apply the reverse charge to labour-only supplies and will bring many more construction businesses within the scope of the reverse charge.

It is assumed that the established case-law principles that govern single and multiple supplies will apply to determine whether a transaction that comprises the supply of goods and the supply of construction services, fails to be treated as a single supply for the purposes of the reverse charge. However, while the VAT liability of a single supply is determined by reference to the principal element of the supply, the VAT reverse charge applies to a single supply even if the construction services element is only an ancillary element of the supply. HMRC’s guidance confirms that “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” and “if any of the services in a supply chain are subject to the reverse charge, all other services (even if that service would be excluded if it were being supplied as a single service) will also be subject to it.


Certain services are excluded from the definition of construction services so that they do not come within the scope of the reverse charge.

 The excluded services include construction services relating to:  

  • Oil, gas or mineral extraction.
  • Manufacture of building, engineering, heating, lighting, air-conditioning or drainage components.
  • Professional services of architects, surveyors or consultants.
  • Artistic works.
  • Signage.
  • Installation of security systems.

However, to the extent that any excluded services form part of a single supply that includes construction services under article 5, the excluded services will be treated as construction services.

As stated above, it is assumed that the case law established principles that govern single and multiple supplies will apply to determine whether a transaction that comprises both construction and excluded services fall to be treated as a single supply for the purposes of the reverse charge. However, while the VAT liability of a single supply is determined by reference to the principal element of the supply, the VAT reverse charge will apply to a single supply even if the construction service element of the supply is ancillary to the main excluded supply. The Chartered Institute of Taxation illustrates this with the example of a builder installing blinds (an excluded service) but also making good the wall (construction service), which would bring the entire supply into the reverse charge.

HMRC guidance states that employment businesses that supply construction workers are not likely to be supplying construction services for the purposes of VAT. Therefore, the reverse charge does not apply, provided that the supplier provides the recipient with the use of an individual who is contractually employed by, otherwise engaged by or is a director of the employment business.

Excepted supplies

Certain services are excepted so that they do not come within the scope of the reverse charge. These exceptions ensure that the reverse charge applies to construction services supplied to other construction businesses only. There are three categories of excepted supplies, which are supplies to: 

  • Contractors that are not required to report payment under CIS.
  • End-users.
  • Intermediaries.

Supplies to contractors not required to report payment under CIS

Supplies to contractors where the contractor is not required to report payment to HMRC under regulation 4 of the Income Tax (CIS) Regulations 2005 (SI 2005/2045) (CIS Regulations) are not within the scope of the reverse charge (articles 3(2) and 8(1)(a), Section 55A Order).

For the CIS reporting obligation, see Practice note, Construction Industry Scheme (CIS): Returns. For the exceptions where payments for construction work are excluded from the CIS (and are therefore not required to be reported), see Practice note, Construction Industry Scheme (CIS): Exceptions.


Supplies to end-users are not within the scope of the reverse charge.

End-users are defined as taxable persons who use the construction services “for any purpose” other than making further supplies of construction services. For example, supplies by building contractors to high street retailers and property owners.

It appears that property developers will also fall within this exception because property developers that have received construction services use those services to make a supply of an interest in the property rather than making further supplies of construction services. HMRC guidance states that end-users are not typically construction businesses with the exception of property developers, which implies that property developers that sell a completed building are end-users. It might be argued that a developer makes an onward supply of construction services if it has an obligation to provide a completed building, for example if the contract provides for the sale of a partly constructed building plus construction services to complete the building. HMRC guidance supports this argument by distinguishing between the type of supplies that a property developer may make. Property developers are, therefore, likely to want to enter into one contract for the sale of the completed building but this is at odds with the desire to enter into a Prudential-style arrangement for SDLT purposes, which involves the developer and buyer entering into two distinct contracts: one for the land and the second for works to ensure that SDLT is only payable on the amount paid for the land.

In contrast with the CIS, there is no deemed contractor status for VAT reverse charge purposes. Accordingly, an entity that is a deemed contractor for CIS purposes because of its annual spend on construction operations (and is therefore required to make reports to HMRC under regulation 4 of the CIS Regulations) will be an end-user for VAT reverse charge purposes if it does not make onward supplies of construction services.

HMRC guidance confirms that an end-user should provide written confirmation to the supplier of its end-user status (so that the normal VAT rules apply) and provides example wording. The guidance note published on 7 November 2018 states that, if an end-user fails to provide such confirmation, it “will still be responsible for accounting for the reverse charge”. The statutory basis for this statement is unclear, and HMRC’s guidance published on 7 June 2019 states that “if the reverse charge treatment depends on the customer’s end user status and the treatment adopted is found to be incorrect (for example, because the customer is an end user but has not provided written confirmation resulting in the reverse charge being applied incorrectly) HMRC will expect the customer to notify the supplier that it is an end user and request a correct invoice”. For certainty, it is advisable that contracts include a recipient warranty of end-user status.


Supplies made to intermediaries (recipients who make onward supplies of construction services without material alteration or further processing) are not within the scope of the reverse charge if either of the following applies: 

  • The intermediary is connected with the expected end-user.
  • An intermediary is connected with an end-user if it is the parent or a subsidiary of the end-user.
  • For example, supplies of building and construction services commissioned by a group company, which are on-supplied to another group company.
  • The supplies are made in relation to land, buildings or civil engineering works in which both the intermediary and the expected end-user of those services have a relevant interest. A person has a relevant interest if the person is, or is connected with, a landlord, lessor, licensor, tenant, lessee or licensee in relation to such land, buildings or civil engineering works but not a person who has a temporary entitlement to occupy.
  • This exception is most likely to be relevant between landlords and tenants where the landlord or tenant commission construction services and on-supply those services to the other.

HMRC guidance provides that intermediaries may refer to themselves as end users and may provide a statement to that effect to suppliers.

Exceptions to the exceptions

A supplier and recipient may agree to apply the reverse charge to excepted supplies if, at or before the time of making the excepted supply, the supplier makes (or has made) to the same recipient for the same construction site, a supply of construction services to which the reverse charge applies.

Unless all elements of a mixed supply are excepted supplies if supplied separately, those supplies cannot be treated as excepted supplies and are instead subject to the reverse charge.

No supply threshold

There is no supply threshold to the VAT reverse charge for construction services. The £1,000 threshold in section 55A(1)(d) of VATA 1994 applies only for the purposes of determining whether the VAT registration threshold is met, and the Section 55A Order ensures that the construction service reverse charge supplies are disregarded for this purpose (see Recipient’s VAT registration threshold).

However, small payments (that is, payments under a construction contract that do not exceed £1,000) are not required to be reported on the CIS return if certain conditions are met. Accordingly, supplies below that £1,000 threshold may be excepted supplies (see Excepted supplies).


The VAT reverse charge takes effect for supplies made on or after 1 October 2019. For supplies that commence before 1 October 2019, the VAT reverse charge will apply to invoices with a tax point on or after 1 October 2019.


Reverse charge invoices

The supplier must show all the information normally required to be shown on a VAT invoice, including the amount of VAT due (although this should not be shown as total VAT charged) and annotate the invoice to make it clear that the reverse charge applies and that the customer is required to account for the VAT . HMRC’s guidance states that inclusion of one of the following on the invoice will meet this requirement: 

  • Reverse charge: section 55A  of VATA 1994 applies.
  • Reverse charge: customer to pay the VAT to HMRC.

VAT returns, enforcement and penalties

The recipient of a reverse charge supply is responsible for accounting for VAT on the supply to HMRC. The normal tax point rules apply to determine when the supply is made and received. For fully taxable recipients, output tax and input tax will be accounted for in the same VAT return and so the VAT liability will be nil.

As the liability is the recipient’s, any debt will be enforced against the recipient rather than the supplier. A reverse charge recipient that fails to account for the reverse charge may: 

  • Be assessed for the supplier’s output tax.
  • Lose the right to deduct input tax.
  • Be liable for penalties and interest.

HMRC guidance confirms that if the supplier incorrectly charges VAT when the reverse charge applies, the recipient will be assessed for that output tax. It will then be for the supplier to return the money collected as VAT and make the appropriate amendments to VAT records and returns. This could likewise give rise to penalties. HMRC has confirmed that it will operate a light-touch approach to penalties for genuine mistakes for a six-month period after the introduction of the reverse charge.

If the supplier correctly applies the reverse charge but the recipient fails to account for tax, HMRC will not seek to recover the output tax from the supplier. Similarly, if the supplier applies the reverse charge incorrectly due to being misled by the recipient, HMRC will not seek to recover the output tax from the supplier, provided that the supplier undertook reasonable checks of the VAT registration status of the recipient.

Recipient’s VAT registration threshold

Ordinarily, reverse charge supplies that exceed the supply threshold of £1,000 count in determining whether a person is required to register for VAT (section 55A(3)VATA 1994). However, section 51  of the Finance Act 2019 includes a power to disapply that requirement in circumstances specified in secondary legislation. The circumstances are prescribed in article 10 of the Section 55A Order.

Accordingly, for businesses trading below the VAT registration threshold, construction service reverse charge supplies will not be counted when considering whether the VAT registration threshold is passed.

Practical points

HMRC has acknowledged that the impact of the introduction of the reverse charge for the construction industry is significant. Accordingly, it has stated that it will adopt a “light-touch” approach when dealing with errors for a six-month period (that is, until 1 April 2020) to allow businesses to adjust. Further, if a business has a large number of contracts with sub-contractors at a variety of sites that are active before 1 October 2019, HMRC will allow the business to apply the same VAT treatment to all the contracts with a particular sub-contractor while the business assesses the specific VAT treatment for each.

Construction businesses should review the supplies that they make to, and receive from, other VAT registered contractors to establish whether the reverse charge applies and consider whether any amendments are required to their invoicing and accounting systems. This will involve undertaking various checks of the VAT and CIS registration status of the recipients of supplies. Paragraph 9.3.1 of VAT Notice 735 lists the type of checks that HMRC expects a supplier to make. HMRC also suggests that suppliers consider requesting a deposit (possibly in a retention account) of an amount equal to the VAT if they have doubts about whether the reverse charge applies (for example, if the recipient has applied for VAT registration but has not yet received a VAT number).

Businesses, particularly smaller businesses, may also need to consider the impact of the introduction of the reverse charge to their cash flows. HMRC guidance acknowledges that the effect of the reverse charge is that some businesses may become repayment traders (that is, their VAT return is a net claim from HMRC instead of a net payment). Repayment traders may, therefore, wish to apply to move to monthly returns.

It is necessary to review all construction contracts to consider whether: 

  • Construction contracts should include a warranty from the recipient that it is an end-user so that the supplier is not required to apply the reverse charge, although it should be borne in mind that this might be commercially sensitive information.
  • The VAT clause is appropriate, including providing that a recipient that is required to operate the reverse charge is only required to pay an amount net of VAT to the supplier and specifically stating whether the reverse charge applies.

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