Domestic reverse VAT charge for building and construction services - February 1st 2021

What is the VAT domestic reverse charge for building and construction services?

Often shortened to 'the reverse charge', it is the new way that VAT will be collected applicable to the building and construction industry. From 1 March 2021 the customer receiving the service must pay the VAT due to HMRC instead of paying the supplier. It will affect sub-contractors supplying their services to main contractors in the construction sector.

Under the new reverse charge system, the sub-contractor will not show VAT on their invoice to the main contractor and will not account for output VAT.

Who does the reverse charge apply too?

It affects those that supply or receive specified services that are reported under the Construction Industry Scheme (CIS).

Individuals or businesses registered for VAT in the UK (not consumers).

Typically it will affect sub-contractors supplying their services to other contractors in the construction sector.

This applies if the services provided are:

standard rated or reduced rated, and
within the scope of CIS.

How does the domestic reverse charge works?

The reverse charge means the customer receiving the specified service has to pay the VAT to HMRC instead of the supplier. In turn the customer can recover the VAT, subject to the normal rules for VAT recovery.

You can find out more about the verification process for VAT and CIS in the government's guide:

You can use the government's flowchart in Annex 1 - VAT domestic reverse charge for building and construction services (PDF, 149KB, 1 page) to check if the reverse charge applies to you.

How do I prepare for the reverse charge?

check whether the reverse charge affects either your sales, purchases or both
make sure your accounting systems and software are updated to deal with the reverse charge
consider whether the change will have an impact on your cashflow
make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

What do contractors need to do regarding the reverse charge?

Contractors will also need to review all their contracts with sub-contractors, to decide if the reverse charge will apply to the services they receive under their contracts. They'll need to notify their suppliers if it will.

What do subcontractors need to to regarding the reverse charge?

Sub-contractors will also need to contact their customers to obtain confirmation from them if the reverse charge will apply, including confirmation whether the customer is an end user or intermediary supplier.

What services are affected by the reverse charge?

The reverse charge will affect supplies of building and construction services supplied at the standard or reduced rates that also need to be reported under the Construction Indsutry Scheme(CIS). These are called specified supplies.

There is an important difference between CIS and the reverse charge where materials are included within a service. The reverse charge applies to the whole service whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content.

The reverse charge doesn't apply if the service is zero rated for VAT or if the customer isn't registered for VAT in the UK.

Employment businesses who supply staff and who are responsible for paying the temporary workers they supply, are not subject to the reverse charge. Read here for more information.

You will need to apply the reverse charge if you supply any of these services:

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

To view the list of services excluded from the reverse charge, view here.

Please contact us if you are likely to be affected by these changes and we can work with you to ensure you are ready for the new system when it starts. If you are a sub-contractor using the VAT flat rate scheme, it may be beneficial to leave that scheme as you may be entitled to a VAT refund on your expenses from 1 March 2021.