Major change: the VAT reverse charge for building and construction services

The domestic reverse charge - referred to as the reverse charge - is a major change to the way VAT will be collected in the building and construction industry.

However a significant number of construction businesses are unaware of it, and many more are unprepared for the coming changes.

The reverse charge regime will come into effect in just two months’ time on 1 October 2019 and will require customers receiving construction services to pay the VAT due directly to HMRC, instead of paying the supplier.


The reverse charge is intended to prevent the avoidance of VAT by suppliers who charge and collect VAT from the recipient of a supply but fail to account for that VAT to HMRC (for example, missing trader fraud).

The reverse charge shifts the responsibility for accounting to HMRC for VAT from the supplier to the recipient. In other words, what is reversed is the party accounting for the VAT. It sounds simple but it throws up considerable administrative issues and is bound to cause confusion in the early days of its introduction, particularly since there are no grandfathering provisions for services supplied under existing contracts, HMRC only published its technical guidance in June, and we understand that HMRC’s VAT helpline is already drowning under the weight of the making tax digital changes.

Services that are affected by the reverse charge

The reverse charge will affect standard-rated supplies of building and construction services - note; not zero-rated supplies - that also fall within the ambit of the Construction Industry Scheme (CIS). Broadly, these services include:

  • constructing, altering, repairing, extending, demolishing and dismantling buildings and structures;
  • constructing, altering, repairing, extending, demolishing and dismantling works forming part of the land;
  • pipelines, reservoirs, water mains, sewers, coast protection or defence;
  • installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection; and
  • painting or decorating the internal or external surfaces of any building or structure.

Other services not on the list above (non-construction services) which are supplied at the same time as these construction services can also be subject to the reverse charge, where those non-construction services are ancillary to the construction services or if the parties elect for the reverse charge to apply to those non-construction services.

End user exemption

However, there are some significant carve-outs from the reverse charge. 

The reverse charge will not apply where the customer is an end user ; a person who will use the construction services received for its own business purposes and not for the purposes of on-supplying those construction services to another. The rationale behind this exception is that the end user’s business is not primarily the supply of building or construction services and therefore it should not be required to apply a reverse charge which is targeting players in the construction industry.

For example, a property owner will not be required to apply the reverse charge where it employs a building contractor to carry out works, provided those works are being procured for the property owner’s business and not for the purposes of on-supplying the construction works to another party. Examples of works procured for the property owner’s business could be;

  • A retailer procuring fit-out works for its shop;
  • A bank engaging a builder to construct new headquarters which will be occupied for its financial services business; or
  • A property investment company engaging a contractor to refurbish offices in preparation for a new letting.

In certain circumstances, the exception to the reverse charge can also extend to companies which are connected with the end user eg development companies (Devcos) that are engaged by, and are connected to, the land owning company.

How will the reverse charge affect you?

Financial impact

Businesses that rely on VAT collected from customers as working capital may suffer cash flow problems once the reverse charge is implemented, since they will no longer be collecting VAT and be able to use that as a cash buffer until accounting for it to HMRC. Such businesses might wish to revisit their payment terms in order to try to mitigate any cashflow issues arising from the changes.

As a result of the reverse charge some businesses may find that, because they no longer pay the VAT on some of their sales to HMRC, they become repayment traders ie their VAT return is a net claim from HMRC instead of a net payment. Repayment traders will be able to move to monthly returns to speed up payments due from HMRC.

Administrative impact

Businesses are going to need to spend time working out whether the reverse charge applies to them and, where the reverse charge applies, suppliers will now be required to make a note on their VAT invoices that it is their customer that is required to account for the VAT to HMRC. Accounting systems will almost certainly need to be updated to deal with these changes.

Identifying whether a customer has end user status will become key. If the VAT treatment adopted by the parties is later found to be incorrect - for example, because the customer is an end user but parties nonetheless apply the reverse charge incorrectly - HMRC will expect the customer to notify the supplier that it is an end user and request a corrected invoice.

We understand that HMRC will not be prepared to offset amounts accounted to it by the wrong parties so, if the reverse charge is not applied where it should be, the customer will have to account for the VAT to HMRC despite having already paid it to the supplier, and will then be required to separately pursue the supplier for a refund.

HMRC suggest that, for businesses that often deal with end users, a practical way of dealing with the question of end user status will be for the business to include a statement in their terms and conditions to say they will assume that their customer is an end user unless they say they are not. This places a responsibility on the customer to respond if this is not the case.

Ongoing impact

Businesses also need to be alive to changes in circumstances where contracts are ongoing, in case the treatment under the reverse charge regime changes. For example, if a property developer owning a brownfield site engages a builder to construct a logistics shed, the starting point will be that the property developer will be an end user. However, if the property developer sells the partly-constructed property to an investor -with the investor also engaging the property developer to complete the construction of the shed - the property developer will cease to be an end user and the reverse charge will start to apply to all future payments made by the property developer to its builder.


Both the Federation of Master Builders (FMB) and the Chartered Institute of Taxation have written to HMRC asking for the implementation date to be pushed back to 1 April 2020 to allow a more dedicated information campaign to be operated. We echo the sentiment that there is a worrying lack of information and dialogue in relation to the upcoming changes and believe HMRC should be doing more to publicise the impact of these rules.

According to the FMB, 69% of construction SMEs have not even heard of the reverse charge and, of the 31% who have, 67% have not prepared for the changes. In other words, with only two months to go before the reverse charge is introduced, only about 10% of SMEs are prepared.

HMRC recognise that implementing the reverse charge ‘may cause some difficulties’ and have said they will apply a ‘light touch’ in the first six months to errors made by those trying to comply and acting in good faith, imposing penalties only for those seeking to take advantage of the rules by not accounting for VAT correctly. This does nothing, however, to reduce the amount of time businesses will be spending trying to get to grips with the new rules or help them understand how to get it right first time.


This information is for general information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. Please contact us for specific advice on your circumstances. © Shoosmiths LLP 2024.



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