How does the VAT reverse charge for construction work?

6 July 2018 | By Alison Birch

To tackle VAT fraud in the construction industry a domestic reverse charge will be introduced with effect from October 2019. Alison Birch, VAT partner at Mitchell Charlesworth, explains what this means for businesses in the construction industry.

What is a reverse charge?

The reverse charge is a mechanism for accounting for VAT whereby the customer charges themselves VAT, rather than the supplier charging VAT. The domestic reverse charge is commonly used to prevent missing trader fraud i.e. the supplier will charge VAT, be paid the VAT and then ‘go missing’ before they declare it to HMRC. As the reverse charge makes it the customer’s responsibility to account for VAT there is no opportunity for the supplier to disappear without paying the VAT to HMRC.

What construction transactions does the domestic reverse charge cover?

This domestic reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector.

What are specified construction services?

Specified construction services include:

Alison Birch

The reverse charge only applies to certain construction services that are subject to the standard rate and reduced rate of VAT. The reverse charge will also apply to goods supplied with those construction services. If a supply contains a mixture of specified and other construction services it will be classed as a single supply of specified services and the domestic reverse charge will apply.

What supplies are excluded?

The following are not included within the definition of construction services:

Additionally, supplies of specified construction services that are not used to make an onward supply of construction services will not need to be reverse charged. This means that the new rules only apply to businesses that are supplying their construction services to another business who will sell on these construction services. It does not apply where the construction services are provided to a consumer of those services (i.e. supplied to a business that has commissioned the construction of a new building). There will also be an exclusion for connected businesses. In these situations normal VAT rules will apply.

When will the domestic reverse charge on specified construction services be introduced?

The domestic reverse charge will be introduced from October 2019.

HMRC have now published draft legislation and asked for comments before 20 July 2018. The final version of the draft order and guidance will be published by October 2018. There is a one year period between the final legislation being published and the date the legislation comes into force. HMRC say that this is to allow small businesses, which are the most heavily impacted, time to adapt to the changes. HMRC will also operate a light touch for genuine mistakes for a 6 month period.

How should building contractors prepare for this change?

Businesses that supply construction services need to understand how they may be impacted by this change. They should be identifying instances where they supply services to other businesses in the construction sector (rather than to a consumer of those services) and if they do operate in this way they need to determine whether the services are included within the list of specified services.  Businesses that are caught by this will no longer charge VAT on their services as the recipient will charge themselves VAT.


Whilst in theory this would appear to be an improvement on the current process and may well reduce elements of fraud I have serious concerns over the practicalities of how companies will be able to manage this both operationally and from a finance perspective. For this to be workable in practice more consideration is needed in relation to the list of exclusions. The current proposals only work for small contractors not large multi disciplinary ones.

Karen Dawson, 18 July 2018

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