VAT Reverse Charge to Apply from 1 March 2021 

February, 2021 - Caroline Airey, Kate Garcia

The VAT domestic reverse charge - referred to below as the reverse charge - is a major change to the way VAT will be collected in the building and construction industry.

The reverse charge regime will come into effect on 1 March 2021 and will in many instances require customers receiving building and construction services to pay the VAT due directly to HMRC, instead of paying the supplier.

This is a fundamental change to the way in which VAT is administered on construction contracts. The introduction of the reverse charge has been delayed twice in order to give businesses more time to prepare, but we still anticipate a difficult period in the coming months as the application of the new rules bed down.


The reverse charge is intended to prevent the avoidance of VAT by suppliers who charge and collect VAT from the recipient of a supply but fail to account for that VAT to HMRC (for example, missing trader fraud).

The reverse charge shifts the responsibility for accounting to HMRC for VAT from the supplier to the recipient. In other words, what is reversed is the party accounting for the VAT.

It sounds simple but it throws up considerable administrative issues and we are already seeing it cause confusion, particularly since there are no ‘grandfathering provisions’ for services supplied under existing contracts.  When added to the huge difficulties presented by the Covid pandemic, it will be inevitable, and understandable, that businesses will not have prioritised an understanding of these new rules in advance of the March deadline.

Services that are affected by the reverse charge

The reverse charge will affect standard-rated supplies of building and construction services - note; not zero-rated supplies - that also fall within the ambit of the Construction Industry Scheme (CIS). Broadly, these services include:

  • constructing, altering, repairing, extending, demolishing and dismantling buildings and structures;
  • constructing, altering, repairing, extending, demolishing and dismantling works forming part of the land;
  • pipelines, reservoirs, water mains, sewers, coast protection or defence;
  • installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection; and
  • painting or decorating the internal or external surfaces of any building or structure.

Other services not on the list above (non-construction services) which are supplied at the same time as these construction services can also be subject to the reverse charge, where those non-construction services are ancillary to the construction services or if the parties elect for the reverse charge to apply to those non-construction services.

End user exemption

However, there are some significant carve-outs from the reverse charge. The reverse charge will not apply where the customer is an end user ; a person who will use the construction services received for its own business purposes (and not for the purposes of on-supplying those construction services to another) who has notified the supplier of its status as such.

We understand the rationale behind this exception is that the end user’s business is not primarily the supply of building or construction services and therefore it should not be required to apply a reverse charge which is targeting players in the construction industry.

For example, a property owner will not be required to apply the reverse charge where it employs a building contractor to carry out works, provided it has notified the contractor of its status and those works are being procured for the property owner’s business and not for the purposes of on-supplying the construction works to another party.

Examples of works procured for the property owner’s business could be;

  • A retailer procuring fit-out works for its shop;
  • A bank engaging a builder to construct new headquarters which will be occupied for its financial services business; or
  • A property investment company engaging a contractor to refurbish offices in preparation for a new letting.

In certain circumstances, the exception to the reverse charge can also extend to companies which are connected with the end user eg development companies (Devcos) that are engaged by, and are connected to, the land owning company.

How will the reverse charge affect you?

Financial impact

Businesses that rely on VAT collected from customers as working capital may suffer cash flow problems once the reverse charge is implemented, since they will no longer be collecting VAT and be able to use that as a cash buffer until accounting for it to HMRC. Such businesses might wish to revisit their payment terms in order to try to mitigate any cashflow issues arising from the changes.

As a result of the reverse charge some businesses may find that, because they no longer pay the VAT on some of their sales to HMRC, they become repayment traders ie their VAT return is a net claim from HMRC instead of a net payment. Repayment traders will be able to move to monthly returns to speed up payments due from HMRC.

Administrative impact

We are seeing that businesses are having to spend considerable time working out whether the reverse charge applies to them and in which circumstances. Where the reverse charge does apply, suppliers will now be required to make a note on their VAT invoices that it is their customer that is required to account for the VAT to HMRC. Accounting systems will almost certainly need to be updated to deal with these changes.

Identifying whether a customer has end user status will become key, as will obtaining written confirmation that is the case. If the VAT treatment adopted by the parties is later found to be incorrect - for example, because the customer is an end user but parties nonetheless apply the reverse charge incorrectly - HMRC will expect the customer to notify the supplier that it is an end user and request a corrected invoice.

We understand that HMRC will not be prepared to offset amounts accounted to it by the wrong parties so, if the reverse charge is not applied where it should be, the customer will have to account for the VAT to HMRC despite having already paid it to the supplier, and will then be required to separately pursue the supplier for a refund.

HMRC suggest that, for businesses that often deal with end users, a practical way of dealing with the question of end user status will be for the business to include a statement in their terms and conditions to say they will assume that their customer is an end user unless they say they are not. This places a responsibility on the customer to respond if this is not the case.

Ongoing impact

Businesses also need to be alive to changes in circumstances where contracts are ongoing, in case the treatment under the reverse charge regime changes. For example, if a property developer owning a brownfield site engages a builder to construct a logistics shed, the starting point may be that the property developer will be an end user. However, if the property developer sells the partly-constructed property to an investor - with the investor also engaging the property developer to complete the construction of the shed - the property developer will cease to be an end user and the reverse charge will start to apply to all future payments made by the property developer to its builder.


There are significant signs that, with only a very short period of time before implementation, construction businesses are struggling to take the necessary steps to prepare for this fundamental change in the application of VAT to the industry. However, after multiple delays to the implementation of the reverse charge, it does now appear that the rules will be implemented from 1 March 2021 and will not be delayed any further.

HMRC recognise that implementing the reverse charge ‘may cause some difficulties’ and have said they will apply a ‘light touch’ in the first six months to errors made by those trying to comply and acting in good faith, imposing penalties only for those seeking to take advantage of the rules by not accounting for VAT correctly. Whilst this is to be welcomed, only time will tell whether the new rules will be implemented smoothly or whether there will be significant chaos caused by their introduction.


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