VAT domestic reverse charge for construction services

Published by Rupert Moyle on 16 July 2019

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This article has been updated to reflect HMRC’s postponement of the new domestic reverse charge to 1 October 2020.

A change to the way contractors in the supply chain will account for VAT comes into effect on 1 October 2020. These new rules represent a significant change as they will remove the current requirement for VAT to be charged on sales invoices from one contractor to another.

Why is this change happening?

The most common fraud in the building industry from HMRC’s perspective is missing trader fraud committed by sub-contractors who provide labour for construction services. HMRC estimates that over £100m a year is lost by this and similar types of fraud and current efforts to protect revenue, such as seeking security deposits in advance, have not been successful.

Fraudulent activity typically works in the following way. Labour suppliers will provide staff charging labour plus VAT to the main contractor and get paid in the usual way. However, they then “disappear” before paying the VAT they have collected from the customer over to HMRC. More often than not, the organisation responsible starts again under a different name and structure which makes it difficult for HMRC to enforce any previous VAT debt.

The simplest way to remove fraud is to remove the ability to charge and collect VAT from the participants; that way there is nothing to defraud.

In the 2017 Budget HMRC announced a consultation to seek opinion on the introduction of the VAT Domestic Reverse Charge for Construction services (DRC) and, following this exercise, legislation was passed with the rules coming into effect on 1 October 2020.

This concept is not new; we already have the domestic reverse charge in the UK for certain items including microchips, mobile phones and wholesale of airtime. It is also not uncommon in the EU with at least 18 member states currently operating a domestic reverse charge in the construction industry.

DRC changes explained

The DRC does not apply to the zero rate; only to supplies at the standard and reduced rates. If there are qualifying and non-qualifying supplies the DRC can apply to the whole supply. The DRC should not affect VAT recovery. Suppliers will need to check if the customer is VAT registered.

It will only apply to charges in the chain of supply and not to end users. End users are those that do not supply building and construction services. Services connected with end users are also excluded, for example recharges between landlords and tenants or corporate groups.

An end user may not always be obvious to the contractor and the onus is on the end user to declare that it is. If not, the DRC will apply which may result in an unexpected cost to the end user.

At present there will not be an official certificate for end users – a declaration should be sufficient. We expect HMRC to suggest suitable wording.

The DRC applies to “construction operations” which are subject to the Construction Industry Scheme (CIS). These include:

  • Groundworks and other preparatory works;
  • Construction alterations and repair of buildings;
  • Installation of heating and lighting/ power systems; and
  • Internal and external painting and decorating.

It doesn’t apply to:

  • Professional services such as architects/ surveyors;
  • Extraction of minerals, drilling for oil, gas etc.; and
  • Repair of building components, e.g. boilers.

And finally, VAT invoices will need to show more details:

  • The need to state that the reverse charge is due; and
  • The value of the DRC, the VAT rate applicable and the VAT due will need to be shown (but not charged and paid over to HMRC).

How does it work

The onus to report the VAT rests with the contractors that receive services rather than the sub-contractors earlier on in the supply chain. In a simple supply chain, the position might be as follows:

Before 1 October 2020
Subcontractor 1

After 1 October 2020
Sub contractor 2

In this scenario the Main Contractor has to apply the reverse charge. This is a two-stage process:
i) It treats the supply from the sub-contractor as if it was supplied by itself and charges itself VAT (at the appropriate rate – 5% or 20%). This has to be paid to HMRC in the VAT return.
ii) As VAT is charged on to the End User, this DRC VAT is treated as expenditure and recoverable in the normal way (on the same VAT return).

The DRC prevents the sub-contractor from charging VAT and not paying it to HMRC but should not create a VAT cost to the main contractor; it should be tax neutral.

What do you need to do?

HMRC issued more detailed guidance on the reverse charge and how it works on 7 June 2019. This can be found at

Fundamentally this is a change to the way contractors account for VAT so systems may need to be changed to deal with it. The change does not take effect until 1 October 2020 and so, particularly in light of the Making Tax Digital requirements, there is time to ensure that your systems are set up to report it and recognise when it is applicable (or not).

If in doubt, talk to your professional advisers.

The authors are Colin Laidlaw, VAT Director, and Rupert Moyle, Partner and Head of VAT,. If you would like to learn more please feel free to contact us here or call us on +44 (0)330 124 1399.

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