Advanced search

Subscribe to our newsletter!

Request a Callback

You are in: Blog

Stephen Hill Partnership Blog

Construction Scheme Domestic Reverse Charge

HMRC Guidance Note on the Reverse Charge for Construction Services




The government has published a final version of the draft legislation, in the form of a statutory instrument which will introduce a VAT domestic reverse charge for building and construction services with effect from 1 October 2019. A tax information and impact note has also been published.


The government announced its intention to introduce a domestic reverse charge in Autumn Budget 2017 in response to organised criminal attacks on the VAT system in the construction sector.


A technical consultation on the legislation was carried out in June and July 2017 and the legislation reflects the results of that and further discussions with stakeholders involved in the consultation.


The purpose of this guidance is to provide an overview and some detail as to how the domestic reverse charge will operate. Due to the diverse nature of the building and construction sector more detailed guidance will be published during the run up to 1 October 2019.


Supplies that will be affected


The domestic reverse charge will only affect supplies at the standard or reduced rates where payments are required to be reported through the Construction Industry Scheme (CIS).


Therefore supplies between sub-contractors and contractors, as defined by CIS, will be subject to the reverse charge unless they are supplied to a contractor who is an end user.


End users will usually be recipients who use the building or construction services for themselves, rather than sell the services on as part of their business of providing building or construction services.


The legislation also allows for those connected to end users, including landlords or tenants, to also be treated as end users. Therefore intra-group and leasing re-charges of building and construction services connected to the end user are also excluded from the reverse charge.


How a domestic reverse charge operates


A domestic reverse charge means that the customer receiving the supply of specified construction services must account for the VAT due rather than the supplier. In tum, the customer deducts the VAT due on the supply as an input, meaning no net tax is payable to HMRC. This removes the scope to evade any VAT owing to HMRC.


The UK has introduced similar measures in response to criminal threats for mobile telephones, emissions allowances, gas, electricity and electronic communications. A domestic reverse charge only applies to supplies between UK taxable persons therefore unless the customer is registered or liable to be registered for VAT it will not apply.


Annex 1 (page 6) is a flowchart to help suppliers of building and construction services assess whether the reverse charge should apply


Implementation of the reverse charge

HMRC understands the difficulties businesses may have in implementing the domestic reverse charge and will apply a light touch in dealing with related errors that occur in the first 6 months after introduction, where businesses are trying to comply with the new legislation.


However, businesses that knowingly claim end user status when the domestic reverse charge should have applied will still be liable for the output tax that should have been paid and may be liable for penalties.


Timing and scope


The domestic reverse charge will take effect from 1 October 2019. Because it only applies to supplies where payments are reported through CIS the supplies affected are closely aligned to those defined as construction operations under CIS.


It applies to the following building and construction services at either standard or reduced rate VAT:


  • construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations


  • construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines, electronic communications apparatus, aircraft rw1ways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence


  • installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection


  • 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 internal or external surfaces of any building or structure


It also applies to services which form an integral part of, or are preparatory to, or are for rendering complete, the services described in the bullet points 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.




Supplies of the following supplies are not covered by the domestic reverse charge if supplied on their own:


  • drilling for, or extraction of, oil or natural gas


  • extraction (whether by underground or surface working) of minerals and tunnelling or boring, or construction of underground works, for this purpose


  • manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site


  • manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site


  • the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape


  • the making, installation and repair of artistic works, being sculptures, murals and other works which are wholly artistic in nature


  • sign writing and erecting, installing and repairing signboards and advertisements


  • the installation of seating, blinds and shutters


  • the installation of security systems, including burglar alarms, closed circuit television and public address systems


This list is not exhaustive and if these or any other non-reverse charge supplies are supplied with supplies subject to the domestic reverse charge please refer to the mixed supplies section below.


Mixed supplies


The legislation is designed so that if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge. This is to make it simpler for both supplier and customer and to avoid the need to apportion or split out the supply.


In addition, if there has already been a domestic reverse charge supply on a construction site, if both parties agree, any subsequent supplies on that site between the same parties can be treated as domestic reverse charge supplies.  This should reduce doubt and speed up the decision making process for both parties.


If still in doubt, provided the recipient is VAT registered and the payments are subject to CIS, it is recommended that the reverse should apply.


End users


End users are those who receive building and construction services but do not supply those services on along with other building and construction services. Under CIS rules, they are required to report their payments to HMRC because they are ‘deemed contractors’, either because they are named in the legislation or because of the amount of purchases of building and construction services they make.


Payments by deemed contractors can be excepted from reporting through CIS, in which case the domestic reverse charge will not apply and the supplier should be advised of this.


The effectiveness of the reverse charge does not depend on supplies to end users being included. However, because suppliers may be unaware they are supplying an end user, it will be up to the end user to make the supplier aware that they are an end user and that VAT should be charged in the normal way instead of being reverse charged. This should be in a written form that is clearly understood and can be retained for future reference.


If the end user does not provide its supplier with confirmation of its end user status it will still be responsible for accounting for the reverse charge.


Completion of the VAT Return




Suppliers of goods or services under the domestic reverse charge must not enter in box 1 of the VAT Return any output tax on sales to which the domestic reverse charge applies, but must enter the value of such sales in box 6.




Customers must enter in box 1 of the VAT Return the output tax on purchases to which the domestic reverse charge applies, but must not enter the value of such purchases in box 6. They may reclaim the input tax on their domestic reverse charge purchases in box 4 of the VAT Return and include the value of the purchases in box 7, in the normal way.




When making a supply to which the domestic reverse charge applies, suppliers must:


  • show all the information normally required to be shown on a VAT invoice


  • annotate the invoice to make clear that the domestic reverse charge applies and that the customer is required to account for the VAT


The amount of VAT due under the domestic reverse charge should be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.


If you produce invoices using an IT system, and that system cannot show the amount to be accounted for, you should read Domestic reverse charge procedure (VAT Notice 735).


Under the VAT Regulations 1995 invoices for domestic reverse charge supplies, when the customer is liable for the VAT, must include the reference ‘reverse charge’. The following examples fulfil the legal requirement:


  • Reverse charge: VAT Act 1994 Section 55A applies


  • Reverse charge: S55A VATA 94 applies


  • Reverse charge: Customer to pay the VAT to HMRC


Tax points


The provision of building and construction services are continuous supplies of services. The tax points are therefore the issue of a VAT invoice or the receipt of payment, whichever is earlier (Regulation 90 of the VAT Regulations 1995). Additionally, in certain circumstances, where there is a delay beyond one year in issuing a VAT invoice or receiving payment, an annual tax point will apply (Regulation 94B(5) of the VAT Regulations 1995).


For supplies spanning 1 October 2019 that are liable to the domestic reverse cha rge, the VAT treatment will be as follows:


  • for invoices with a tax point before 1 October 2019, the normal VAT rules above will apply and you will charge VAT at the appropriate rate on your supplies


  • for invoices with a tax point on or after 1 October 2019, the domestic reverse charge will apply


Further guidance


Detailed guidance on the other domestic reverse charge measures can be found in Domestic reverse charge procedure (VAT Notice 735).


VAT Notice 708: buildings and construction will also be updated to include details on the domestic reverse charge. There is also guidance on the Construction Industry Scheme.

Share this post:

Leave a comment: