VAT Reverse Charge for Construction Services

Introduction

The VAT domestic reverse charge for construction services shifts the responsibility for accounting for VAT from the supplier to the customer. If you're VAT-registered and work in the construction industry, you need to understand when this applies to you — whether you're buying or supplying services — and how to handle it correctly on your invoices and VAT returns.

What is the domestic reverse charge?

Under normal VAT rules, a supplier charges VAT to their customer and pays it to HMRC. With the reverse charge, the supplier does not charge VAT on their invoice. Instead, the customer accounts for the VAT directly on their VAT return — both as output tax (VAT owed) and, if eligible, as input tax (VAT to reclaim). This was introduced as an anti-fraud measure for certain goods and services, including construction services from 1 March 2021.

When you must use the reverse charge as a buyer

You must use the reverse charge if you're VAT-registered in the UK, buy building and construction services, and all of the following apply:

• Payment for the supply is reported within the Construction Industry Scheme (CIS)
• The supply is standard-rated or reduced-rated (zero-rated and exempt supplies are not included)
• You're not hiring staff or workers through an employment business
• You're not using the end user or intermediary supplier exclusions (explained below)

Before applying the reverse charge, you must check that your supplier has a valid UK VAT number.

When you must use the reverse charge as a supplier

You must use the reverse charge if you're VAT-registered in the UK, supply building and construction services, and all of the following apply:

• Your customer is VAT-registered in the UK
• Payment for the supply is reported within the Construction Industry Scheme (CIS)
• The services you supply are standard-rated or reduced-rated
• You're not an employment business supplying staff or workers
• Your customer has not given you written confirmation that they are an end user or intermediary supplier

You should check your customer has a valid UK VAT number and is registered for CIS. You can use the Construction Industry Scheme online service to verify their CIS registration. Customers who are CIS contractors may not always show up on these checks — if this happens, ask them to confirm they are reporting under CIS before applying the reverse charge (unless they've told you they're an end user or intermediary supplier).

To check CIS registration, you'll need different details depending on whether your customer is a sole trader, partner in a firm, or company. For a sole trader, you need their name, unique taxpayer reference, and National Insurance number. For a partner, you need the firm's name and unique taxpayer reference, plus the partner's details. For a company, you need the company name, unique taxpayer reference, and company registration number.

Who is an end user?

An end user is a business that is both VAT-registered and CIS-registered but does not make onward supplies of the building and construction services it receives. Building contractors are not usually end users because they typically do make onward supplies of construction services.

Importantly, if services are provided to a private domestic customer, the reverse charge does not apply because the customer is not VAT-registered. This does not make the contractor supplying the householder an end user — supplies made to them by subcontractors are still subject to the reverse charge if the other conditions are met.

There is a 5% disregard rule: if a business predominantly acts as an end user but re-supplies less than 5% by value of the construction services it receives, it can still issue an end user declaration to its supplier.

Who is an intermediary supplier?

Intermediary suppliers are VAT-registered and CIS-registered businesses that are connected or linked to end users. If you buy construction services and re-supply them to a connected or linked end user without making material changes, you can be treated as an end user and the reverse charge does not apply.

To be connected or linked to an end user, you must either have a relevant interest in the same land where the construction works take place (such as a landlord and tenant relationship), or be part of the same corporate group or undertaking as defined in section 1161 of the Companies Act 2006.

Design and build companies can be intermediary suppliers if they meet the conditions. Under a design and build contract, the company buys in construction services from multiple suppliers and offers them as a single supply to the client. If the design and build company is connected to or linked with an end user, it can be treated as an intermediary supplier and normal VAT rules apply to supplies it buys in.

How to opt out: written notification

Being treated as an end user or intermediary supplier is optional. To opt out of the reverse charge, the customer must tell their supplier in writing that they are an end user or intermediary supplier. Only once this written notification is made can the supplier stop applying the reverse charge and charge VAT under normal rules.

Written notification can be made by post, email, or within a contract (including Heads of Agreement or call-off contracts). Once given, you do not need to reissue the notification if your status changes between end user and intermediary supplier. Intermediary suppliers can refer to themselves as end users when notifying suppliers.

Example wording: "We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge."

If you're a supplier and believe your customer is an end user but they have not notified you in writing, you must still apply the reverse charge (assuming the customer is VAT and CIS registered). You can ask them to confirm their status, but there is no legal obligation for them to do so.

If written notification is not made correctly, the customer remains liable for accounting for the VAT that should have been charged under the reverse charge.

How to apply the reverse charge as a buyer

Once you've confirmed the reverse charge applies, you need to:

• Confirm your accounting systems and software can handle the reverse charge
• Check the invoice you receive is correct (it should show that the reverse charge applies and should not include VAT)
• Record the reverse charge on your VAT return — you account for both the output tax and, if you can reclaim VAT, the input tax in the same return

How to apply the reverse charge as a supplier

Once you've confirmed the reverse charge applies, you need to:

• Confirm your accounting systems and software can record the reverse charge
• Issue invoices that clearly show the reverse charge applies (do not charge VAT on these invoices)
• Consider whether you want to move to monthly VAT returns (this may help with cash flow)

Snagging works and the reverse charge

Snagging works are remedial works to correct faulty workmanship or replace faulty materials. Even though contractors may not charge their customers for snagging works, this does not make them end users. Any work they subcontract relates to the original contract for construction services to the customer, so the reverse charge still applies to supplies they receive from subcontractors.

Sources

• How to use the VAT domestic reverse charge if you buy building and construction services
• How to use the VAT domestic reverse charge if you supply building and construction services
• Domestic reverse charge procedure (VAT Notice 735)
• VAT domestic reverse charge technical guide

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.