The Law

S55A VATA 1994 (customers to account for tax on supplies of goods or services of a kind used in missing trader fraud) provides that where a taxable person makes a supply of goods or services to which that section applies, and the supply is not an excepted supply, then it is for the recipient (if they are a taxable person), on the supplier’s behalf, to account for and pay the VAT on the supply.

The regulations apply to construction services together with any goods supplied with those services which fail to be treated as part of a single supply of services.

Construction services are:

  1. construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations;
  2. 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 runways, 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;
  3. installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;
  4. internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
  5. painting or decorating the internal or external surfaces of any building or structure;
  6. services which form an integral part of, or are preparatory to or are for rendering complete, the services described in paragraphs (a) to (e), including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundation, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

Construction services do not include:

  • 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-condition, 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;
  • signwriting 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.

However, excluded services described above shall be treated as construction services to the extent that they form part of a single supply that includes services described under the construction services.

The following services are excepted from the new rules;

  • supplies of specified services in respect of which a payment is not required to be included in a return made under Reg 4 (Construction Industry Scheme) Regulations 2005;
  • supplies of specified services, not excepted under (a), which are made to an end user or to intermediary supplier provided that:
    • the intermediary supplier is connected with the expected end user of those services; or
    • the supplies are made in relation to land, buildings or civil engineering works in which both the intermediary supplier and the expected end user of those services have a relevant interest

However, a supply will not be treated as an excepted supply if:

  • at the same time as the making of the supply or at any time before it is made (but not before the commencement of this Order), the supplier makes or has made any other supply of specified services to the same recipient in relation to the same construction site;
  • that other supply is not or was not expected; and
  • the supplier and the recipient agree that the supply shall not be treated as an excepted supply.

Where there is a supply of specified services comprising more than one identifiable element, the supply is not expected unless all of those elements, if supplied separately, would be excepted under the exclusions above.

A person is connected with another where one of them is an undertaking in relation to which the other is a group undertaking and ‘undertaking’ and ‘group undertaking’ have the meaning given in s1161 Companies Act 2006.

A person has a ‘relevant interest’ in land, buildings or civil engineering works where that person is, or is connected with, a landlord, lessor, licensor, tenant, lessee or licensee in relation to such land, buildings or civil engineering works but does not include temporary entitlement to occupy land, buildings or civil engineering works for the purpose of making supplies of specified services.


Published on 5 June 2020, HM Revenue & Customs Brief 7/2020 announced that the implementation of domestic reverse charge on construction services would be postponed until 1 March 2021. SI 578/2020 also included an amendment to require end users and intermediary suppliers to notify their subcontractors of their end user or intermediary supplier status in writing. The amendment is designed to make sure both parties are clear whether the supply is excluded from the reverse charge. It reflects recommended advice published in HMRC guidance and brings certainty for subcontractors as to the correct treatment for their supplies. If the advice is followed, it will remove a concern that HMRC may seek to challenge the reverse charge treatment where a business that qualified as an end user or intermediary supplier had not given any notification of their status.

What you need to do to be ready for the start of the domestic reverse charge

You need to prepare for the 1 March 2021 introduction date by:

  • checking whether the reverse charge affects either your sales, purchases or both
  • making sure your accounting systems and software are updated to deal with the reverse charge
  • considering whether the change will have an impact on your cash flow
  • making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

What contractors need to do

If you’re a contractor, you’ll also need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts. You’ll need to notify your suppliers if it will.

What sub-contractors need to do

If you’re a sub-contractor you’ll also need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end user or intermediary supplier.

How the domestic reverse charge works

The reverse charge means the customer receiving the specified service has to pay the VAT to HMRC instead of the supplier. In turn the customer can recover the VAT, subject to the normal rules for the VAT recovery.

How the domestic reverse charge will affect you

HMRC understands that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.

Any errors need to be corrected as soon as possible, as the longer under declared or overcharged sums remain outstanding the more difficult it may be to correct or recover them.

HMRC officers may assess for errors during the light touch period, but penalties will only be considered if you are deliberately taking advantage of the measure by not accounting for it correctly.

Monthly returns

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 (their VAT Return is a net claim from HMRC instead of a net payment).

Repayment traders can apply to move to monthly returns to speed up payments due from HMRC. The best time to move to monthly returns will depend on the business and whether they want to have monthly returns from March, or to delay a little to offset some of the VAT they owe to HMRC on periods spanning 1 March.

For example, if a customer submits a quarterly return up to 28 February 2021 and requests a change to monthly returns on 14 April 2021, March will be a monthly return and the return periods from then on will be monthly.

If the request is made in May 2021, March and April would be a 2 month return with monthly returns from then on.

Services with reverse charge and non-reverse charge elements

If any of the services in a supply are subject to the reverse charge, all other services (even if that service would be excluded if it were being supplied as a single service) will also be subject to it.

Supply and fix works will be subject to the reverse charge. For example, a joiner constructing a staircase offsite then installing it onsite is making a reverse charge service, even if they charge for the installation is only a minor element of the overall charge.

In addition, if there has already been a reverse charge service between 2 parties on a construction site, and if both parties agree, any subsequent construction supplies on that site between the same parties can be treated as reverse charge services.

If there is doubt whether a type of works falls within the definition of a specified service as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply.

Determining reverse charge treatment of existing contracts to be ready for 1 March 2021

For some businesses with large numbers of active contracts with sub-contractors at a variety of sites, it may be difficult to establish whether the reverse charge applies or not in the run-up to 1 March 2021 and afterwards.

For example, on some sites a construction group may be a property developer and on other sites a building contractor, and on both sites their status could change.

To avoid uncertainty and delay to payments whilst each contract is checked HMRC recognises that it will be easier if one VAT accounting treatment is given to all contracts with a particular sub-contractor.

So, if the contractor looks across all construction contracts with a sub-contractor and can see that reverse charge applies to more than 5% of contracts (by volume or value) with that sub-contractor, then the reverse charge may be applied to all the contracts.

For contracts starting after 1 March 2021, you should decide whether the reverse charge applies from the start of the contract.

End users and intermediary supplier business

End users

The reverse charge does not apply to consumers or final customers of building and construction services. Any consumers or final customers who are registered for VAT and CIS will need to ensure their suppliers do not apply the reverse charge on services supplied to them, find out more in the Asking customers about end user or intermediary status section.

For reverse charge purposes consumers and final customers are called end users. They are businesses, or groups businesses, that do not make onward supplies of the building and construction services in question, but they are registered for CIS as mainstream or deemed contractors because they carry out construction operations, or because the value of their purchases of building and construction services exceeds the threshold for CIS.

Intermediary suppliers

Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end users.

To be connected or linked to an end user, intermediary suppliers must either:

  • share a relevant interest in the same land where the construction works are taking place
  • be part of the same corporate group or undertaking as defined in section 1161 of the Companies Act 2006.

Reverse charge treatment of end users and intermediaries

The concept of intermediary suppliers means that if a number of connected businesses are collaborating together to purchase construction services, they are all treated as if they are end users and the reverse charge does not apply to their purchases.

For example, a property-owning group may buy construction services through one member of the group and recharge those services to either other group companies, their tenants or both. All the members of the property owning group and their tenants will be end users and the reverse charge should not apply.

Landlords, lessors, licensors, tenants, lessees or licensees and any persons ‘connected’ to them have a relevant interest in land. Having an agreement for lease is also a relevant interest in land. However, having a relevant interest in land does not include temporary rights to occupy land to carry out building and construction services.

You cannot choose whether you are an end user or an intermediary supplier because it is a matter of fact.

Asking customers about end user or intermediary status

You may not be sure whether you are supplying a customer who is an end user or intermediary supplier. In this situation, you should ask the customer if they are an end user or intermediary supplier and keep a records of the answer. It will be up to the customer to make the supplier aware that they are an end user or intermediary supplier and that VAT should be charged in the normal way instead of being subject to reverse charge.

Sometimes it may be obvious that the customer is an end user, for example if there is a repeat contract, and it will be acceptable for you to charge VAT in the normal way.

Examples of end users include UK VAT registered mainstream or deemed contractors under CIS rules. They are typically not construction businesses and are found in the retail, manufacturing, utilities and property investment sectors as well as public bodies. Property developers should also be end users in cases where they do not make onward supplies of building or construction services.

Intermediary suppliers can call themselves end users in all communications which should be in writing (either digitally, or on paper). There is no set wording, but this is an example of suitable wording:

‘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.’

If the reverse charge treatment depends on the customer’s end user status and the treatment adopted is found to be incorrect (for example, because the customer is an end user but has not provided written confirmation resulting in the reverse charge being applied incorrectly) HMRC will expect the customer to notify the supplier that it is an end user and request a corrected invoice.

In the case of self-billing, a new invoice will have to be issued and the VAT will have to be paid to the supplier.

When to check if your customer is VAT and CIS registered or an end user

Some businesses contract with a lot of customers who are consumers of construction services. For example, some energy utilities provide heating installation and maintenance services to home and property owners through their websites and hotlines.

Where sales networks are clearly set for consumer sales it is not necessary to check the VAT, CIS or end user status of the customer and the normal VAT rules should apply.

If you are sure your customer is an end user because you have provided similar services under the same sort of contract before, and you believe that the customer’s status is unchanged, you can apply normal VAT treatment without asking the customer to confirm they are still an end user.

For businesses that often deal with end users, a practical way of dealing with the question of end user status is 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.

Verifying the VAT status of customers

Before you can apply the reverse charge, you need to be satisfied that your customer is VAT registered. You can check that your customer’s VAT number is valid and belongs to them on the European Commission website.

Verifying CIS registration of customers

You do not need to verify the CIS registration of existing customers if your contract is within CIS (but you should keep evidence of this where you have it, such as a deductions certificate as part of your VAT records).

You should ask new customers to provide details of their registration as a contractor for CIS purposes, or a copy of their CIS verification of you, and retain these.

However, if you are registered for CIS as a contractor HMRC recommends you use the CIS verification system. You will still be asked to confirm that you have placed an order with a sub-contractor before completing the verification, but for VAT purposes you can confirm this even though an order has not been placed by you.

Completing your VAT return

VAT on sales

For sales under the domestic reverse charge suppliers must not enter any output tax on sales to which the domestic reverse charge applies in box 1 of the VAT Return. The net value of the sale must be entered in box 6.

VAT on purchases

If you are purchasing a service subject to the reverse charge, you must enter the output tax on purchases the domestic reverse charge applies to in box 1 of the VAT Return. Make sure you do not enter the net value of the purchase in box 6.You may reclaim the input tax on your domestic reverse charge purchases in box 4 subject to the normal rules, and you should enter the net value of the purchases in box 7 as normal.

Cash Accounting Scheme

The Cash Accounting Scheme cannot be used for the supply of services that are subject to the reverse charge.

This will have an impact on how some businesses manage their accounts. However, under the reverse charge, no VAT is actually paid by customers to suppliers, so there will be no additional adverse cash flow impact for businesses who are cash accounting.

Instead it is the customer who accounts for the VAT directly to HMRC. They can reclaim that VAT simultaneously on the same VAT Return, subject to the normal rules on VAT input tax deduction.

Sub-contractors making reverse charge supplies

If you supply a service subject to reverse charge, you will no longer need to account for VAT on that service.

You can still use the Cash Accounting Scheme for supplies that are not within the reverse charge. However, you’ll have to use cash accounting for your purchases so you may find that the Cash Accounting Scheme no longer helps your cash flow. If this is the case, you can withdraw from the scheme.

Contractors receiving reverse charge supplies

Under normal VAT rules, if you receive construction services and use the Cash Accounting Scheme you cannot reclaim the VAT on the supply of that service until you have paid your supplier.

From 1 March 2021, if you receive services that fall under the reverse charge your supplier will no longer charge you VAT. Instead, you will account for the VAT and recover it simultaneously on the same VAT Return, subject to the normal rules on VAT input tax deduction.

This accounting should be done on either the date of your supplier’s invoice or the date on which you pay your supplier, whichever comes first. Read the What a tax point is section for more information.

Businesses that currently account for VAT on the basis of payments made and received

HMRC recognises that many small businesses in the construction sector prefer to account for their VAT on the basis of payments made and received.

The reverse charge will bring in the following changes.


For sales, no VAT will be due on payments from customers where the supply is covered by the domestic reverse charge.

All you need to do is include the value of the sale in box 6 of your VAT Return when you receive the payment.

If you supply services that are not subject to the reverse charge (for example to private individuals or end users), you must account for VAT on the dates you were paid.


If you receive a service subject to the reverse charge from sub-contractors you will have to account for the VAT in box 1 of your VAT Return and recover it simultaneously on the same VAT Return, subject to the normal VAT rules on VAT input tax deduction.

You can account for this on the date you make the payment to your sub-contractor, unless they have issued you with a tax invoice beforehand, in which case you should account for the VAT using the date of the invoice.

Flat Rat Scheme

Reverse charge supplies are not to be accounted for under the scheme. Therefore, users of the scheme will have to consider if it is still beneficial to them when VAT is not being paid to them on some or all of the invoices they issue.

Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC.

MTD development

From April 2022, the VAT MTD project will be extended to all VAT-registered businesses with turnover below the VAT threshold (£85,000), which presumably means not so much a change in law but a change in process for those affected businesses.