Domestic reverse VAT 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.
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:
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 into check if the reverse charge applies to you.
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.
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.
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:
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.