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After two delays, the new rules for certain building services will come into force from 1 March 2021.

Under the current rules, a business (for example a builder) will add VAT to the sales invoices they pass to their customers, and then account for these to HMRC via the VAT return. 

HMRC has identified a high amount of what is called "missing trader fraud" in the construction industry, i.e., where the trader charges and collects VAT, but then absconds with it without paying it to HMRC. To give it its full title, the domestic VAT reverse charge seeks to clamp down on this by shifting the responsibility for accounting for VAT to the customer under certain circumstances. Where the rules apply, the trader will not charge VAT on their invoice. Instead, their customer will account for the VAT by making a reverse charge on their VAT return. In practical terms, this means that the customer will include the VAT in both Box 1 and Box 4 on the VAT return. This is a neutral process - the customer's VAT liability for the period will increase, but they will have the corresponding amount in their bank account as they won't have paid it to the trader. The rules can apply to both standard and reduced rated services, but not to zero rated services.

When do the rules apply?

The reverse charge rules won't apply to all transactions in the construction industry. In particular it doesn't apply if the customer is the end user in the supply chain. As an example, a construction company that uses the services of a subcontractor for a project it is completing for a client is not an end user. However, if the construction company engaged the subcontractor to work on its office buildings it would be the end user as there is no onward supply.

If the customer is connected or linked to the end user, e.g., they are part of a corporate group, they may be classed as an "intermediary supplier". The rules are not applicable in this case.

The rules only apply to supplies between VAT-registered businesses that are within the scope of the Construction Industry Scheme (CIS). Broadly, this means that most supplies between subcontractors and contractors will be affected. HMRC has also said that the rules don't apply to the subcontractor unless the answer to the following questions is "yes":

1. Are any of the supplies you are making within the scope of the CIS?

2. Is the supply either standard or reduced-rated?

3. Is your customer VAT registered?

4. Will your payment be reported under CIS?

5. Are you sure the customer is not an end user?

There is also a disregard, where the reverse charge does not need to be applied if the relevant services do not exceed 5% of the invoice total where different services are provided. In all other cases, normal VAT rules will apply.

HMRC has published a comprehensive technical guide with information for suppliers, intermediaries, and end users.

Which services?

HMRC specifies that the following services will be subject to the reverse charge:

  • constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
  • constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant, and installations for purposes of land drainage, coast protection or defence
  • installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
  • internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension, or restoration
  • painting or decorating the inside or the external surfaces of any building or structure
  • services which form an integral part of or are part of the preparation or completion of the services described above - including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

Professional services, such as those provided by an architect, are excluded from the reverse charge rules. Employment businesses that supply workers are outside the scope of the rules, as they are supplying staff not construction services.

The rules will however apply to any materials supplied by a subcontractor as part of their work.

Who decides?

This third iteration of the rules puts the onus onto the customer to tell their supplier if they are an end user or intermediary supplier, particularly if the subcontractor regularly deals with these types of customer. So, if a subcontractor wants to raise an invoice, they will assume normal VAT rules apply unless the customer instructs them otherwise. HMRC suggests making a statement in the terms and condition to this effect, i.e., that the subcontractor will assume the customer is an end user or intermediary supplier, unless the customer says otherwise.

Projects that straddle 1 March

The new rules can't apply before 1 March 2021. For invoices raised in respect of projects that are already ongoing at this date, the tax point rules will need to be considered. If the tax point is before 1 March, normal VAT rules will apply. If the tax point falls on or after 1 March, the new rules will need to be considered. In most cases, the tax point will be either the date of the invoice or the date payment is received.

For the government’s guidance on this topic, please click here.

What to do next

We appreciate that this is a complex area. Please call or email me if you have any queries before or after 1 March. You can reach me on 0191 567 8611 or at


About the Author

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Martin Johnson

With expertise in advising family-owned companies on a range of tax, accountancy and business issues, Martin also has an in-depth knowledge of the automotive and property sectors. In addition, he provides advice on inheritance tax planning and wealth management to owner-managed businesses.  Martin leads the firm in developing its expertise in the buy-to-let sector, advising both residential and commercial property owners on relevant tax and legislation issues.   A further element to Martin’s role is to build Torgersens’ relationships with banks, financial advisors and specialists in commercial and employment law to ensure that the firm’s clients have access to market-leading guidance.  

To get in touch please e-mail

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