VAT reverse charge for construction: Delayed but not dropped


Further delay in introducing the domestic VAT reverse charge for construction and building services has led some to question the likelihood of this change ever coming into force. Phil Hall of the Association of Accounting Technicians (AAT) explains why no government is likely to abandon the change

The domestic reverse VAT charge means the customer who gets supplies of construction or building services will be responsible for the VAT due on those supplies on their VAT return. At present, the supplier is responsible.

VAT-registered suppliers of goods and services in the construction sector currently charge their customers VAT and then pay these sums to HMRC, ordinarily on a quarterly basis. As a result, suppliers hold money due to HMRC for several months before it is paid. This naturally helps suppliers cashflow – but it also delays receipt of tax to the Exchequer.

The current system also creates a significant opportunity to commit fraud because some unscrupulous suppliers charge customers an additional sum on the pretence that it is VAT yet never account for this payment to be passed on to HMRC. The scale of this fraud is estimated at close to £100m a year and is the primary driver for change.

Who does this new charge cover?

This charge will apply exclusively to transactions between VAT-registered contractors and subcontractors who are registered for the Construction Industry Scheme (CIS).

It applies to both standard and reduced-rate VAT supplies but not to zero-rated supplies.

There are numerous exemptions, including the manufacture of components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection and the installation of seating, blinds and shutters, as well as the installation of security systems, including burglar alarms, closed-circuit television and public address systems.

If any non-reverse charge supplies are supplied with supplies that are subject to the domestic reverse charge then the whole supply is subject to the domestic reverse charge.


A reverse charge exists in other areas of the tax system and has been floated for the construction industry for several years.

AAT first responded to a government consultation on the idea of a VAT reverse charge in 2017. A technical consultation on the draft legislation and its impact took place a year later and the final legislation and guidance were published in November 2018.

That legislation contained a commitment to introduce the domestic reverse charge for building and construction services on 1 October 2019.

However, following concerns expressed by AAT, the National Federation of Builders, the Federation of Master Builders and others, this was delayed for a year until October 2020 because many businesses were not ready to implement the changes required.

As a result of the impact of Coronavirus on the construction industry, it was delayed again, this time until 1 March 2021.

Further delay?

Some have raised doubts as to whether the change will ever come into force. The sector should be in no doubt, repeated delays do not mean this change will be abandoned.

Indeed, the Treasury minister responsible for implementing the charge, Jesse Norman MP, said in July: “The government remains committed to introducing the VAT reverse charge for building and construction. VAT fraud in this sector still presents a significant risk to the Exchequer.”

It is estimated implementation of the VAT reverse charge will save almost £100m a year for the taxpayer through a reduction in VAT fraud. Given the state of the British economy, every £1 of revenue is going to be desperately needed and so reforms such as the VAT reverse charge are inevitable, irrespective of which party is in government.

The next few months

Of course, much of the sector has already invested in changing invoicing and associated systems, staff training and the like.

Such investment is likely to pay longer-term dividends as those companies who were already prepared for change will probably be better placed to cope when the delayed changes finally come into force.

AAT has repeatedly urged all affected parties, those in the construction industry, their accountants, software providers and, of course, HMRC, to make the most of these delays so that all are well prepared for the 1 March 2021 implementation date.

HMRC has consistently promised to provide support and communications to ensure that construction businesses are fully aware and can prepare for cashflow challenges ahead of the new implementation date.

AAT is playing its part too, having held a number of free webinars on the subject for AAT licensed bookkeepers and accountants and a range of free regional branch events for members and non-members alike.

When the new charge comes into force next year, there can be little excuse that construction or building firms were unaware of the change or that their advisers were unprepared. As a result, HMRC is understandably likely to take a very tough line on enforcement.

Although the reverse charge switches the VAT liability from the supplier to the customer, there is much that suppliers can do to help their customers.

For example, where possible, asking in advance if the reverse charge applies, checking their customers VAT and CIS status, checking invoice templates comply with HMRC guidance and so on.

Any prudent suppliers will also want to know what measures their clients are putting in place to deal with the inevitable reduction in cashflow that this change will create.

Many suppliers are likely to tighten their terms of trading to protect themselves from the financial struggles a reduced cashflow may generate among their customer base.

Despite initial appearances, reversing the charge is not an entirely one-way process. It will have an impact on all parties.

Further information

Regularly updated, comprehensive guidance and information about the domestic VAT reverse charge for building and construction services is now available from HMRC here.

Information about AAT events on the subject can be found here or you can find an AAT-licensed accountant here.


Phil Hall

VAT reverse charge for construction

Head of public affairs and public policy

Association of Accounting Technicians (AAT)

+44 (0)7392 310264


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