Are you ready for the new domestic reverse charge for the construction industry?

Nick Giles, tax specialist at chartered accountants Page Kirk, explores some of the complexities of the new arrangements for the construction industry

AFTER a number of false starts, the domestic reverse charge for the construction industry was finally introduced on 1 March, 2021. As a brief reminder, this new reverse charge will apply to the supply of construction services by sub-contractors, where all of the following four conditions are met: the sub-contractor is registered for VAT; they are registered for CIS; they supply work classed as building work within the CIS regulations; and the customer is not an ‘end user’ or ‘intermediary supplier.’

It is this last point that has required the most clarification for many people involved in the construction industry. What exactly is an ‘end user’ or ‘intermediary supplier’?

An end user is a business that will be VAT and CIS registered and which receives supplies of construction services, but does not then make an onward supply of construction services. Essentially, the work ends with them.

For example, Business X is constructing houses and contracts with Business Y to do some of the building work. Business Y will be supplying the end user, Business X, as Business X will not be making an onward supply of construction services. In this instance, the reverse charge will not apply.

However, if Business Y sub-contracts some of the work to Business Z, Business Z would not be supplying services to the end user, Business X, but to the contractor, Business Y. In this instance the reverse charge would apply.

An intermediary supplier is a business that is VAT and CIS registered, receives supplies of construction services and makes an onward supply to the end user, but which is connected or linked to the end user.

Where this is the case, the reverse charge does not apply.

A supplier will be linked or connected to an end user where they also have an interest in the land on which the construction work is taking place or are a company that is part of the same corporate group as the end user.

A key point is that it’s the responsibility of the customer to tell the supplier whether they are the end user or an intermediary supplier.

Suppliers should get this in writing from their customers.

Without written notification from the customer, suppliers should assume the reverse charge applies and not charge VAT to the customer.

This notification, however, is not mandatory and end users and intermediary suppliers can remain silent on the point and accept a reverse charge invoice from their supplier.

This would provide a cash-flow benefit for businesses who now no longer need to pay output tax on their invoices to subsequently claim it back on their VAT return.

Finally, I need to mention some of the key practical issues that businesses will need to keep in mind.

Care should be taken that VAT is not charged on invoices where the reverse charge should apply.

HMRC will have the power to assess businesses as though the reverse charge had been applied correctly and deny input tax claims.

A business would then have to go back to the supplier to ask for a VAT credit, which could be time consuming at best and, at worst, may not be possible if the supplier has disappeared or will not co-operate.

Many businesses may find that they incur VAT on purchases but do not now charge VAT on supplies.

This will put them in a refund position when it comes to completing their VAT return and businesses that submit quarterly or annual VAT returns may wish to switch to monthly returns to accelerate the VAT repayments and improve cash flow.

Finally, businesses must ensure that their accounting software is set up to deal with the changes and that the correct codes are used to post invoices.

Companies should also get in the habit, if they are not already, of checking customers’ VAT numbers using HMRC’s new VAT number checking service.

If you have any questions regarding the domestic reverse charge for construction services, or any VAT questions in general, please contact a member of Page Kirk to see how we can help you and your business.

Call 0115 955 5500 or e-mail: