VAT: New guidance on reverse charge for building services

Construction worker, supervisor discuss blueprints at work site
Share this content

HMRC has published extended guidance on the new domestic reverse charge for building and construction services, which will be introduced on 1 October 2019.

The new guidance appears to cover much more detail than was included with the draft legislation in December 2018. But this is such a fundamental change to the VAT rules it seems likely there will be transactions where the new rules create disputes.

In brief

The domestic reverse charge (DRC) is a major change to the way VAT is collected in the building and construction industry. It requires the customer receiving the service to pay VAT to HMRC instead of paying it to the supplier.

It will only apply to individuals or businesses registered for VAT in the UK supplying specified services reported under the Construction Industry Scheme (CIS). The DRC does not apply if the service is zero-rated or if the customer is not registered for VAT in the UK. It also does not apply to services which are supplied to ‘end users’ or intermediaries connected with end users. More details are in the HMRC guidance.

Questions answered

There have been updates to the previous draft guidance on the following:

  • How to check whether the customer is VAT registered or CIS registered
  • How and when it is necessary to check that a customer is an end user or an intermediary
  • Changing VAT treatment in the middle of a contract
  • Completing VAT returns
  • Contracts spanning 1 October: the guidance outlines transitional rules for payments due on any supplies entered into accounting systems before 1 October 2019, but paid on or after 1 October 2019.
  • Where large contractors hold many contracts with a single subcontractor: if the DRC applies to more than 5% of those contracts (by volume or value) the HMRC guidance says the DRC may be applied to all the contracts.

HMRC has advised businesses will need to prepare for the change by:

  • checking whether the DRC affects either sales, purchases or both
  • informing regular clients or suppliers
  • ensuring accounting systems and software are updated to deal with the DRC
  • considering whether the DRC will have an adverse impact on cash flow as the (legitimate) opportunity to use the amount of VAT paid, between the time it is received from the customer and the time it has to be paid over to HMRC, will no longer exist.


HMRC’s implementation of this change has been subject to criticism. The detailed guidance has been a long time coming and we are now only three months from implementation. The industry had been told there would be a 12-month lead time. For main contractors with hundreds or even thousands of live projects and sub-contractors, there is a lot of work needed to review and collate the necessary information in a very short timeframe.

The implementation date for DRC was originally chosen as being six months after Brexit and Making Tax Digital for VAT, but the introduction of the DRC is going to almost coincide with Brexit, as well as the date for MTD for deferred businesses. So DRC makes a third huge systems issue coinciding in October 2019.

In their original consultation, HMRC proposed that the DRC would apply to ‘labour only’ supplies in the construction industry, identified as the source of the VAT fraud the DRC is intended to target. However, it is now clear that it will only cover the provision of construction services that include materials: “employment businesses” supplying staff are excluded. This has raised questions as to how the DRC will meet HMRC's original policy intention.

Finally, there has been criticism of HMRC’s publicity on this change for sub-contractors, particularly for small businesses.

During the consultation process, HMRC was asked to put warning announcements on the ‘VAT for Builders’ page on, but apparently this can only be used for existing law. The new guidance is not easily found on and doesn’t feature on the HMRC “announcements” page. It remains to be seen if smaller businesses will be prepared by 1 October 2019.

About Linda Skilbeck

Linda Skilbeck

Linda is a Senior Manager with Buzzacott in London and has over 30 years’ experience in VAT. She joined HM Customs and Excise (now HMRC) after University and moved into private practice in the 1980s. She has worked for BDO Stoy Hayward, Grant Thornton and PricewaterhouseCoopers  and SOC VAT Consultants where she specialised in advising charities, not for profit organisations and property companies, and as a VAT technical writer.

Linda advises not for profit organisations, charities, and social enterprises on VAT and in particular capital projects, partial exemption, and international services. She is currently Vice chair of the CIOT Indirect Tax Technical Committee and a member of the VAT Practitioners Group.


Please login or register to join the discussion.

17th Jun 2019 10:46

"The new guidance is not easily found on ..."


Thanks (1)
to dgilmour51
17th Jun 2019 11:14

But you have to know it's there first! ;-)

Thanks (2)
17th Jun 2019 12:27

Overview question:

So if you are a small builder, with contractors, when do you pay the VAT to HMRC on your purchases falling under the scheme?

Ie is this a monthly payment? Or do you literally have to pay HMRC the VAT every time you pay your suppliers their net (net of VAT, net of CIS) payment?

Thanks (0)
to ireallyshouldknowthisbut
17th Jun 2019 14:08

Nobody pays the VAT

The contractor doesn't pay it, but doesn't reclaim it either, it just goes on both sides of their VAT return just like EC reverse charge.

The loser is the subbie who has to bank roll HMRC for the input VAT on their materials for up to 127 days.

Thanks (1)
to ireallyshouldknowthisbut
17th Jun 2019 13:47

Yet again the subbie gets hammered and the contractor gets improved cash flow - doesn't pay the VAT so doesn't have to wait for VAT Return to reclaim it.

Thanks (2)
to Smokoe Joe
17th Jun 2019 16:44

That's right. It's supposed to be an anti-fraud measure so VAT due is immediately netted off against VAT reclaimable by the customer. However, the fact that HMRC identifed the biggest source of fraud as being labour-only suppliers, and then excluded them from reverse charge, makes it difficult to see how effective this will be.

Thanks (3)
to Linda Skilbeck
18th Jun 2019 10:17

So are we saying that a subby that suppliers no materials and is labour only is excluded from the reverse charge and so the end user doesn't reclaim the vat

Thanks (0)
to Annie Turner
18th Jun 2019 10:42

You need to check the guidance on what HMRC regard as an "employment business"

Thanks (0)
to Smokoe Joe
19th Jun 2019 09:19

@smoko Joe.

Right, I am with you know, so its just like an intra-EU B2B purchase, no VAT on subbies, and in theory do the reverse charge (albeit in practice don't bother)

My one and only CIS registered client (a small builder) will be chuffed with the cash flow advantage from his subbies.

Of course given most of the fraud would be NOT charging VAT in the first place by taking cash in hand to stick under the threshold by the subbie, or claiming back VAT you haven't been charged in the first place this does seem utterly pointless quite frankly as it hits none of those things. I am not sure what fraud exactly it does help, but that is not my problem.

Thanks (1)
to ireallyshouldknowthisbut
20th Jun 2019 16:54

The fraud is labour only subbies register for VAT, charge VAT, get paid VAT which is reclaimed by the contractor but disappear without filing a VAT return or paying the VAT over.

Thanks (1)
17th Jun 2019 12:45

I have a number of subcontractors who have greater than 50% material content in their sales invoices, they are going to have to switch to monthly VAT or their cash flow will be completely floored, they cannot afford to bank roll HMRC for up to 120 days!

MTD is a big enough shambles, don't need this on top.

It would be bearable if they were sensible and allowed a system similar to CIS gross status. DRC is aimed at catching the missing traders but the gross status regime should weed these out as it is pretty hard to get unless you are a bona fide subcontractor.

Thanks (5)
18th Jun 2019 08:13

I wonder how many times this guidance will change between now and 1st October 2019.

More complexity and another two tier system to deal with.

Thanks (1)
By Matrix
23rd Jun 2019 08:14

What happens if the sub-contractor does not state on their invoice that the services are subject to the reverse charge? Does the contractor still apply the reverse charge or do they pay the VAT?

My contractors tell me that they are lucky to get any paperwork from their subbies and most don’t have accountant. So will the contractors have to hold their hand?

Thanks (0)
to Matrix
01st Jul 2019 09:35

Well it's the contractor who's ultimately responsible now, so when the subbies mess it up due to having no clue and no representation, it's now the contractor who gets pumped instead of the subbie that HMRC don't have the resources to track down. So regardless of the paperwork supplied (or not supplied), the contractor has to make sure it's right.

The motivation for this, as with the IR35 changes, seems to be to move all the responsibility for tax in problem areas to bigger enterprises that are easier to find and police, to try and help HMRC collect the tax they're ill equipped to find at the moment.

Thanks (0)
05th Jul 2019 09:29

The section in the guidance on cash accounting is very confusing, you cannot use it for DRC supplies but you can use it for normal ones, I don't see the point in that, there is no O/P VAT under DRC so why would the method of accounting make any difference.

Thanks (0)

Related content