A new VAT reverse charge on construction services


The way that VAT operates in the construction industry is changing with the introduction of a VAT reverse charge. Normally, the supplier is responsible for paying any VAT due to HMRC but under the VAT reverse charge, the customer is responsible for paying the VAT to HMRC.

The new rules apply to supplies from 1 October 2019, including to supplies made under contracts entered into before that date. This is an anti-fraud measure so that the supplier cannot charge the customer VAT and then fail to account for the VAT to HMRC. We do not expect the new rules to apply to most payments made by housing providers for construction services. In most cases, the normal VAT rules will continue to apply.

When does the VAT reverse charge apply?

The reverse charge will apply to supplies made on or after 1 October 2019 if:

  • both the supplier and the customer are registered (or should be registered) for VAT;
  • the supply is subject to VAT at either the standard or reduced rate (zero rated supplies are not affected by the reverse charge);
  • the supply comprises construction services; and
  • the supply is not an excepted supply.

What are construction services?

This term is defined in the same way as "construction operations" under the Construction Industry Scheme (CIS). It includes alteration, repair, demolition, site clearance, scaffolding, installation of systems (e.g. lighting, air-conditioning and drainage), internal cleaning during construction, painting, decorating and landscaping. It also includes any goods supplied as part of the service.

Some services are specifically excluded from being construction services, including the manufacture of materials, delivery to the site, the work of architects, surveyors or other consultants and the installation of blinds, shutters and security systems.

If a supply is a supply of a specifically excluded service (e.g. manufacture and delivery of a new staircase) but the supply contains an element (however small) of construction services (e.g. fitting the staircase) then the whole supply is a supply of construction services. If the joiner only delivered the staircase to the site and did not install it, the supply would be excluded from being a construction service.

What are excepted supplies?

There are four scenarios where the supplies are excepted supplies. If any of these scenarios apply then the reverse charge will not apply:

  • The customer is not obliged to report the payments on a CIS return. A customer who is not part of the mainstream construction industry and who has not breached the threshold for registration as a deemed contractor for CIS purposes is not obliged to register as a CIS contractor nor report payments on a CIS return. Payments made gross under the CIS (where the supplier is registered with HMRC for gross payment) are reported on a CIS return and so gross payment status does not mean the supply is an excepted supply.
  • The customer is an "end user" (someone at the end of the construction supply chain who is not making further supplies of construction services) e.g. the property owner.
  • The customer is part of the same corporate group as the end user e.g. a design and build company.
  • The customer has an interest in the site at the same time as the end user e.g. a tenant who receives landlord works which it supplies to its landlord.

Worked example

  • A landlord employs an unconnected contractor, Builder A, to carry out a renovation programme on its housing stock. As the landlord is not supplying construction services to anyone else, it is the end user and the reverse charge rules do not apply to supplies by Builder A. Therefore, Builder A would charge the landlord VAT and pay that VAT to HMRC in the normal way.
  • If Builder A sub-contracts part of the work to Builder B then the reverse charge rules would apply to supplies by Builder B to Builder A. Builder B should not charge VAT and Builder A should operate the reverse charge and pay the VAT straight to HMRC.
  • If the landlord sold the housing stock part way through the renovation programme but agreed with the buyer that it would finish the renovation programme then, from that point on, supplies from Builder A to the now ex-landlord would be within the reverse charge as the ex-landlord would no longer be an end user.

Drafting construction contracts

The parties to a construction contract will have to consider what contractual protection they require in relation to the reverse charge. For example, it would be advisable for a supplier of construction services to obtain a contractual statement from its customer as to whether the supplies will be excepted supplies (e.g. because the customer is an end user) and an obligation on its customer to notify if the position changes. The parties may also want to agree how to correct the position where a mistake is made and the wrong party has accounted for the VAT.


The new rules represent a major change for VAT accounting in the construction industry and given the complexity of the new rules there is the potential for the wrong person to account for the VAT. Helpfully, HMRC have produced useful guidance and said they will apply a "light touch" for errors made in the first six months.


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