Reverse charge for construction services – are you ready?

You might have read that new procedures are being introduced on 1 March 2021, which affects any VAT registered construction business that does the following:

  • Buys in construction services from other builders and makes an onward supply of those services to another customer eg where a subcontractor invoices the main contractor on a project, and the latter invoices the final ‘end user’ client.
  • Sells construction services to other builders where the builders make an onward supply of the services to their customer.

What is changing?

Under current rules, a builder charges VAT to his customer, collects the VAT from the customer and accounts for it in Box 1 of his relevant VAT return. This is changing for supplies between VAT registered builders: the builder will invoice his builder customer without charging VAT, and the customer makes the Box 1 entry instead on his own VAT return. In effect, there will be no cash flow issue for the builder receiving services because the same amount of VAT declared in Box 1 will also be included as input tax in Box 4 ie a nil effect overall. This is known in VAT speak as a ‘reverse charge’ procedure.

Reason for change

HMRC has identified that certain builder supplies have been prone to VAT fraud, where the supplier charges VAT to his customer, receives money for this VAT from the customer but never declares it on a VAT return. The new procedures aim to prevent this from happening because the supplier is never paid VAT in the first place.

Which sales are caught by the new rules?

The new reverse charge procedures will apply to the following transactions:

  • The legislation refers to ‘specified services’ but these do not apply to services supplied to non-construction businesses, such as a high street retailer having his premises improved or any other end user customer or building owner;
  • The reverse charge will also apply to any goods supplied by the builder as part of his work;
  • Employment businesses are excluded from the new rules;
  • The reverse charge is based on the rate of VAT that applies for the work in question, but only supplies subject to either 5% or 20% VAT ie excluding zero-rated sales.


Mike is an electrician, VAT registered as a sole trader. He is doing some work on an office block, invoicing the main contractor Steve for his work, who is also VAT registered, and Steve will then invoice the building owner. Steve is not an ‘end user’ because he is making an onward supply of construction services to his own customer. He is an ‘intermediary supplier’. The invoice raised by Mike will be subject to the new procedures ie no VAT is charged – let’s say the value of his work including materials will be for £5,000:
Mike’s VAT return – will only include the value of the sale in Box 6 (outputs) of his VAT return:

  • Box 6 – outputs – £5,000

Steve will do the reverse charge calculation and make the following entries on his return:

  • Box 1 – output tax £1,000 (ie £5,000 x 20%)
  • Box 4 – input tax – £1,000 (same figure as Box 1)
  • Box 7 – inputs – £5,000 (net value of payment made to Steve)

Other issues to consider

Taking the Steve and Mike example a stage further, they each have their own responsibilities with the new rules:

Mike – must ensure that Steve is both registered for the CIS (Construction Industry Scheme) and also has a valid VAT number. Mike must also specify on his sales invoices the amount and rate of VAT that Steve must declare with the reverse charge ie 5% or 20% VAT. Mike should include wording on the sales invoice along the lines of: “Reverse charge: customer to pay the VAT to HMRC.”

Steve – must tell Mike if he is an ‘end user’ or ‘intermediary supplier’ – if the latter, then Mike will not charge him VAT because the reverse charge applies. It is important that Steve does not pay VAT incorrectly to Mike because HMRC could raise an assessment for the VAT that he should have declared ie as if the reverse charge had been done correctly.

Here are a few other points to consider:

  • Checks should be applied to ensure that building contractor clients being invoiced under the new rules are properly registered for VAT and are bona fide – if you google search on “HMRC VAT Notice 735” and look at section 9, this gives further information.
  • HMRC suggests that if there are any doubts about the credentials of a builder customer, then a deposit equal to the amount of VAT not being charged should be collected from the customer eg if he has applied for but not received his VAT number.
  • VAT Notice 735 mentioned above gives examples of customer checks that should be considered at para 9.3.1. Click the link to view:

Using accounting software

Most software packages will have the capacity to enter the appropriate entries for the reverse charge transaction. Some may have specific codes to use. You should check with your software that you have the latest version and what guidance they advise on reverse charge entries so that the VAT return is formulated correctly.


Hopefully this article gives you an introduction and the key issues to consider with the new rules but please do let us know if you have any questions, click here for some further details or call the office on 01923 776818.

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