VAT domestic reverse charge in the construction industry


With effect from 1 October 2019 businesses in the construction industry will need to apply a domestic reverse charge on payments subject to the Construction Industry Scheme (CIS).

The reverse charge means that instead of the supplier charging, collecting and accounting for the output VAT, the obligation to account for VAT transfers to the customer who will be able to recover this VAT as input tax under the normal rules.
Similar to the domestic reverse charge on mobile phones, computer chips and telecoms services this has been introduced as an antifraud measure to protect against the loss of VAT due to missing trader fraud.  Missing trader fraud is committed where large amounts of VAT flow through generally legitimate supply chains but one of the parties collects the VAT from its customer and disappears without paying it over to HMRC. 

The reverse charge means that no VAT changes hands thereby removing the potential for any VAT theft.  
Which supplies are affected?
In general, the domestic reverse charge will apply to construction services which are reported under the CIS, but
  • It will include goods supplied as part of these services;
  • It will include “mixed invoices” for simplification purposes, i.e. invoices which include both supplies that do and supplies that do not fall under CIS reporting;
  • If a payment by a “deemed contractor” is excepted from the CIS reporting, the domestic reverse charge will not apply, and the supplier should be advised of this.

The domestic reverse charge will apply through the whole supply chain until the customer is an “intermediary supplier” or an “end user”.  In that case the normal invoicing and VAT accounting rules apply.  
Services subject to the domestic reverse charge include:
  • constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
  • constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours
  • pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
  • 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 and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
  • painting or decorating the inside or the external surfaces of any building or structure
  • 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

Services not subject to the domestic reverse charge include:
  • drilling for, or extracting, oil or natural gas
  • extracting minerals and tunnelling, boring, or construction of underground works, for this purpose
  • manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
  • manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
  • the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
  • making, installing and repairing art works such as sculptures, murals and other items that are purely artistic
  • signwriting and erecting, installing and repairing signboards and advertisements
  • installing seating, blinds and shutters
  • installing security systems, including burglar alarms, closed circuit television and public address systems
Who is an “intermediary supplier” or an “end user”?
An end user is only receiving but not supplying construction services.  They are a business, or a group of businesses, that does not make onward supplies of the construction services in question but is registered for CIS as mainstream or deemed contractor because it carries out construction operations, or because the value of its purchases of building and construction services exceeds the threshold for CIS.

Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to “end users”, i.e. they either
  • share a relevant interest in the same land where the construction works are taking place; or
  • are part of the same corporate group or undertaking.

Both intermediary suppliers and end users need to confirm their end user status to their suppliers in writing to ensure the reverse charge does not apply and HMRC has suggested suitable wording in its guidance and clarified that intermediary suppliers can call themselves “end users” for this purpose.  Should the end user fail to do this, the reverse charge will apply, and the end user will be responsible for accounting for VAT.

Invoices and VAT returns
It is worth noting that the invoicing and reporting requirements are different to those applying to the cross-border reverse charge.

For the domestic reverse charge, the supplier’s invoice must show all information normally required on a VAT invoice.  However, whilst the VAT amount due should be clearly stated it must not be shown as VAT charged.  The invoice must also include a reference to the domestic reverse charge.

The supplier only completes Box 6 on its VAT return, i.e. the net value of the sale.

The customer completes Box 1 (the VAT amount), Box 4 (the input tax amount) and Box 7 (the net value of the sale).    

Points to note
Business in the construction industry should familiarise themselves with the new rules. In particular, they should
  • Review their supply chain and identify intermediary suppliers and end users;
  • Notify their suppliers of their own end user status, if applicable;
  • Check the VAT and CIS registration status of their customers;
  • Review the invoicing and reporting requirements;
  • Update their systems, processes and terms & conditions; and
  • Review the cash flow implications including considering submitting monthly returns to speed up any VAT repayments if applicable.

HMRC's guidance provides more details including examples of typical scenarios, the application to certain sectors and transactions and situations where HMRTC will accept simplifications.

Article by Antje Forbrich and Alan Pearce.