Blogs/Vlogs

VAT domestic reverse charge within the construction industry

30 July 2019

Although we have known about the new rules since 2017, please find below the key information in relation to the changes that come into effect on 1 October.

The BIG Change

The reverse charge regime makes it the responsibility of the recipient of the service to account for the output tax on the transaction, rather than the supplier.

Therefore, if you buy in the services of a subcontractor in the course of your business, it will be your responsibility to account for the output tax on the transaction.

The reverse charge will cover the provision of construction services whether they are ‘labour only’ or supplies that include materials such as ‘supply and fit’. The new rules are specifically for businesses that buy and sell construction services that are reportable under the Construction Industry Scheme (CIS).

You will have 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.

The new rules will not affect the following transactions:

  • supplies that are zero rated
  • supplies of construction services between connected parties
  • supplies between landlord and tenant
  • services to an end user, such as construction services being supplied to a shop for a new fit out, or services to a property developer that sells newly built properties to their If you consider yourself to be an end-user, you must let your subcontractors know to prevent them for applying the reverse charge to their sales invoice. Please find below some wording for your communications:

‘We are an end user for the purposes of section 55A, VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.’

Practical points

  1. Any invoices raised under the new regime will contain the same details as a VAT invoice
  2. You must make it clear that the reverse charge applies by caveating any reverse charge invoices with the following statement: ‘Reverse charge: VAT Act 1994, Section 55A applies’
  3. You must ensure that the customer knows how much output tax to declare to HMRC
  4. For the purchase of subcontractors’ services, you will declare their output tax in box one of the VAT return and reclaim it (subject to the normal rules) in box four of the You will pay your supplier the net amount as per the invoice. If you are a subcontractor that solely raises sales invoices under the new rules, you will find that each time you submit a VAT return, you will be owed money from HMRC (input tax on purchases) because you have no output tax to declare.

Action points

  • If you are an end user, make sure your suppliers know so that they can treat the sale correctly when invoicing
  • Speak to your customers to see if they are end users and update your accounting records accordingly
  • Make sure your accounting system is ready by having a reverse charge tax code set up for either sale or purchases, or maybe both
  • Make sure your accounts team is familiar with the new rules
  • Change to monthly VAT returns to improve cash flow if, as a consequence of the new rules, your business will be in a repayment position
  • If you are on the flat rate scheme, please check whether it is still beneficial to use the scheme
  • Cash accounting businesses can continue to operate as such on supplies that fall outside of the scheme. You may find that it is no longer beneficial to use the scheme on such supplies. If so, you can withdraw from using the scheme.

If you wish to discuss this further, please do not hesitate to contact me or your local UHY representative to discuss your options.

Alternatively, visit our property sector page to see how our expertise can help you.

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