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VAT domestic reverse charge – how does this affect the construction industry?

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Following an initial postponement in October 2019, and then a further delay due to the pandemic, HMRC have announced that the reverse charge mechanism to combat VAT fraud in the construction industry will come into force from 1 March 2021, as section 55A of the VAT Act 1994.

The types of supply to which the reverse charge will apply are borrowed from the meaning of ‘construction services’ in the Construction Industry Scheme (CIS) legislation, Finance Act 2004.

The measure aims to the shift liability to account for VAT on supplies of construction services to the customer rather than the supplier in certain circumstances.  

Why the change?

This action will help to prevent cases of ‘missing trader’ or ‘carousel’ fraud within the construction industry. This type of fraud occurs when criminal businesses, often working in cohesion, obtain separate VAT numbers in order to pass goods and/or services down a supply chain. Eventually, one of the traders in the chain goes ‘missing’ after receiving output VAT from its customers, but before paying the amounts over to the Government. 

The construction sector is particularly at risk because a labour-only business can charge VAT despite incurring relatively little on its costs, and amounts charged to customers are often significant.

Placing the liability to account for VAT with the customer means that the supplier does not charge or receive an amount in lieu of VAT, removing the risk of that cash not being appropriated to HMRC.

Who’s affected?

The reverse charge will affect all customers in the supply chain who receive services, which they themselves use to make an onward supply of ‘construction services’ as defined in the legislation – i.e. to the final contractor in the supply chain.

For example: a contractor receiving supplies from a sub-contractor, who passes them on to their customer as part of a further supply of a construction services project, must reverse charge the supplies of the sub-contractor. However, a main contractor, receiving supplies which it consumes in its final supply of a completed property, will not. 

There are some exceptions, such as for certain supplies made to contractors operating in the same VAT or corporate group.

All of that does, of course, lead to a change in the way VAT-registered sub-contractors, who are working in the construction sector, must account for VAT going forward. A sub-contractor will no longer charge VAT on their supplies; they’ll instead show the rate of VAT to be reverse charged. They’ll still be making taxable supplies, which entitle them to remain VAT registered and recover input VAT on their costs.

Further details around the administrative requirements (such as specific wording, which must be included on invoices etc.) can be found within the HMRC published guidance below:

How to use the VAT reverse charge if you supply building and construction services:

How to use the VAT reverse charge if you buy building and construction services:

Check when you must use the VAT reverse charge for building and construction services:

Need help?

If you’re concerned about how the reverse charge will impact your business from 1 March 2021, please feel free to contact a member of the Larking Gowen VAT Teamon 0330 024 088 or email

Gillian McGill


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Larking Gowen

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