The reverse charge for VAT on construction services was originally due to come into force on 1 October 2019, but its introduction was later pushed back until 1 October 2020. On 5 June, HMRC confirmed that the major anti-fraud measure is now being further postponed until 1 March 2021 in light of the coronavirus pandemic.

Although businesses registered for VAT that are in the construction sector will be principally affected, A domestic reverse charge means the UK customer who gets supplies of construction services must account for the output VAT due on these supplies on their VAT return, rather than the UK supplier.

HMRC believes that this measure removes the scope for fraudsters to steal the VAT due to the Treasury.

Key features of the new measure

The purchaser will apply the reverse charge when all the following are met:

  • The supply for VAT consists of construction services and materials.
  • It is made at a standard or reduced-rate of VAT.
  • Between a UK VAT registered supplier and UK VAT registered customer.
  • Supplier and customer are registered for CIS.
  • The customer intends to make an ongoing supply of construction services to another party.
  • The supplier and customer are not connected.

The CIS reverse charge does not apply to any of the following supplies:

  • Supplies of VAT exempt building and construction services.
  • Supplies that are not covered by the CIS, unless linked to such a supply.
  • Supplies of staff or workers.

The CIS reverse charge does not apply to taxable supplies made to the following customers:

  • A non-VAT registered customer.
  • ‘End Users’ i.e. a VAT registered customer who is not intending to make further on-going supplies of construction.
  • ‘Intermediary suppliers’ who are connected e.g. a landlord and his tenant or two companies in the same group.

Potential issues for businesses

It will require a significant change of approach in many CIS businesses:

  • Staff will need to be trained to identify relevant CIS contracts and End-Users.
  • Accounting and bookkeeping systems will need to be modified to cope with the new invoicing and reporting obligations.
  • The use of the VAT Flat Rate Scheme and Cash accounting may not be possible.
  • Cash flow will be affected and those at the start of the supply chain may become VAT repayment claimants: they need to consider whether to file monthly returns.
  • It may require a business that is the recipient of the supply to VAT register.

What services will be within the CIS 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. This includes 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.

Excluded services

  • Drilling for, or extracting, oil or natural gas.
  • Extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose.
  • Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site.
  • Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site.
  • The professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants.
  • Making, installing and repairing artworks such as sculptures, murals and other items that are purely artistic.
  • Signwriting and erecting, installing and repairing signboards and advertisements.
  • Installing seating, blinds and shutters.
  • Installing security systems, including burglar alarms, closed-circuit television and public address systems.

Certain services can become included

  • If there is a reverse charge element in a supply, then the whole supply will be subject to the domestic reverse charge. 
  • If there has already been a reverse charge service between two parties on a construction site, and if both parties agree, any subsequent construction supplies on that site between the same parties can be treated as reverse charge services.
  • If there is doubt whether a type of works falls within the definition of a specified service, as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply.
  • The contractor is asked to consider all construction contracts with a sub-contractor. If they can see that reverse charge applies to more than 5% of contracts (by volume or value) with that sub-contractor, then the reverse charge may be applied to all the contracts.


Assuming that the legislation will come into force, businesses will face a high compliance burden in evaluating contracts.  We will be rolling out a product to reduce the time and costs associated with the new measure.

SRC-Time are one of the South East’s leading accountancy firms in advising individuals and businesses in all aspects of their tax affairs and we are able to assist in any issues raised above.

Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at  or speak with an account manager to get any process started.

Example: How the CIS reverse charge works

Paul  (who is VAT registered) supplies the materials and roofs a new office building for Mark who (who is also VAT registered) and in turn supplies its construction services to Nipun a property developer (also VAT registered). Nipun will  bring the build to completion and supply a finished commercial building to ACME Ltd, his client.

  • Paul would under the old VAT system, invoice Mark  £120,000, comprising of his £100,000 bill for materials, labour and works, plus £20,000 in VAT (at 20%).

From March 2021, under the new CIS reverse charge mechanism, Paul invoices Mark £100,000. His invoice states that ‘the CIS reverse charge applies’  and that the applicable rate of VAT is 20%.

  • Mark pays Paul the net £100,000 fee. It then accounts for output and input VAT of £20,000 on the supply on its own VAT return.
  • Paul does not account for output VAT in his accounting system as he has invoiced only his fee £100,000.
  • As a consequence of the reverse charge procedure, Paul charges and receives £20,000 less than under the old system (where he would charge £100,000 + VAT). He does not have to account to HMRC for any output tax on the transaction.
  • When he is paid by Mark includes the value of the sale in box 6 of his VAT Return. He does not add VAT to box 1 as he receives no output VAT.
  • The change may well impact Paul’s cash flow, as under the old rules, if Mark was a prompt payer he could hope that he could use the £20,000 in VAT to purchase his materials. He could then purchase his materials and offset the input tax paid against his output liability.
  • Mark has a cash flow advantage, he does not have to pay Paul £20,000 and then at the end of his VAT quarter he cannot reclaim £20,000 as he is accounting for the reverse charge and the output VAT offsets the input VAT.
  • As Nipun is supplying CIS services he must also consider the reverse charge. Will its client (ACME Ltd) be involved in the onward supply of CIS services? In this case, this may be difficult to determine as apparently Nipun is selling a finished building to ACME Ltd as an investor and the reverse charge does not apply. It is Nipun’s responsibility to notify down the supply chain.

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