VAT – Reverse charge for building and construction services

1 February 2024

The VAT Domestic Reverse Charge (DRC) for building and construction services was introduced on 1 March 2021. For all businesses within these industries, it is important to be aware of the relevant supplies that this applies to and how it works in practice.

Which supplies does it apply to?

The DRC relates to supplies made at the standard rate and reduced rate of VAT where payments are required to be reported through the Construction Industry Scheme (CIS). Importantly, unlike the CIS scheme which excludes costs incurred on materials from the calculation, the reverse charge applies to the entire service if the provision of materials is part of it.

The system therefore applies to most supplies between sub-contractors and contractors. Supplies made to ‘end users’ and to intermediaries connected with end users are excluded from the new rules. End users are final customers who won’t be making onward supplies of the building and construction services they are receiving. For instance, developers who have bought a building for construction, landlords letting out property and tenants renting property, all qualify as end users.

How it works

The domestic reverse charge for the building and construction industry works in the same way as similar charges which were brought in to prevent fraud within the telecommunications industry.

The mechanism, an accounting procedure, removes the obligation for the seller to charge VAT on its supply to the customer, collect it and then remit it to HMRC. Instead the customer is required to self-account for the VAT due on the supply they receive and recover that amount as input tax on the same VAT return, subject to the usual VAT recovery rules.

Practical example:

A practical example would be where a sub-contractor provides services covered under the CIS to a contractor converting a commercial building into residential flats for a developer landlord. All the parties are registered for VAT. The value of the services being supplied by the sub-contractor to the contractor comes to the value of £5,000.

Under the previous rules, the sub-contractor would have raised an invoice to the contractor for £5,000 plus VAT of £1,000. The contractor was able to recover this £1,000 as input tax in its VAT return (subject to their usual input VAT recovery position).

Following the introduction of the DRC for the building and construction industry, the sub-contractor no longer needs to charge the VAT on the supply to the contractor. The contractor instead receives an invoice for £5,000. The contractor, however, then needs to account for £1,000 in Box 1 of their VAT return as an Output VAT charge and reclaim the same £1,000 in Box 4 of their VAT return (subject to their usual input VAT recovery position, i.e., if the contractor is not normally able to recover input tax in full this adjustment could create a VAT cost for it.

On the basis that the developer landlord notifies the contractor of its end-user status, the contractor will not be required to use the reverse charge accounting method for its onward supply of services and would just charge the developer VAT as they do at present.


The new rules have led to difficulties for suppliers because there is a requirement to not only identify whether the supplies being made fall within the meaning of construction services for CIS, but also whether the supplies are being made to an “End user”, as supplies made to “End users” are subject to VAT as normal.

The positive news however is that the legislation does put the onus firmly on the end users and intermediary suppliers to inform suppliers of their end user or intermediary status in writing. Failure to do so will mean that the reverse charge (as the new default position of accounting for domestic supplies of CIS services) will need to be applied.

Furthermore, it should be noted that, unlike supplies made in the telecommunications industry where the supplies are always standard rated, within the building and construction industry there can be a combination of zero rated, reduced rated and standard rated supplies being made. It could be common practice for invoices to therefore be raised with some supplies being subject to the domestic reverse charge (standard and reduced rated supplies) and some not (zero rated supplies).

Next Steps

If you believe that your supplies fall within the Domestic Reverse Charge rules or have any queries in relation to this or other complexities with VAT, please do not hesitate to contact Stephen Patey, Senior Manager in our VAT department.


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