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The CIS Reverse Charge – Waking the Slumbering Giant

UPDATE: Since this article was written, HMRC has, in a carefully worded brief, announced the postponement of the introduction of domestic reverse charge for construction services for 12 months to 1 October 2020. As a result, proposed dates below may change accordingly.

There has been much focus in recent months on the delivery of Making Tax Digital for VAT (MTDfV), and the time is now upon us. However, in case you’re thinking about relaxing and just focussing on your standard tax compliance work for the rest of the tax year, be warned.

VAT Domestic Reverse Charge for Building and Construction Services

Otherwise known as the ‘CIS reverse charge’, this will be a significant change to the way VAT will be accounted for in the building and construction industry. Moreover, the change is coming shortly.

Why All the Fuss?

As of October 1st 2019, the responsibility for paying VAT due to HMRC will shift from the supplier to the customer for certain supplies of specified construction services.

The ‘customer’, a VAT-registered main contractor, will be required to withhold the input VAT charged to them by their ‘supplier’, where the supplier concerned is a VAT-registered sub-contractor. The ‘customer’ will then account to HMRC in respect of the VAT withheld, the ‘reverse charge‘.

6 Key Points

  1. The reverse charge applies throughout the supply chain to the point where the customer receiving the supply is no longer considered a business providing construction services.
  1. At the start of a contract, VAT-registered subcontractors should ascertain whether their customer is making payments under CIS rules to establish whether the domestic reverse charge rules apply.
  1. Subcontractors should assume that the reverse charge does not apply if their customer is not making payments according to CIS rules.
  1. Equally, if the customer is applying CIS, then suppliers will be able to use the reverse charge unless their customer has confirmed in writing that they are an ‘end-user’ for reverse charge purposes.
  1. Suppliers’ VAT invoices must outline clearly that their services are subject to the domestic reverse charge, clearly indicate the amount due under the reverse charge, but not include the amount shown as total VAT charged.
  1. For continuous supplies of specified services, invoices with a tax point before October 1st 2019 will be subject to the standard VAT rules, if paid before the December 31st. Invoices with a tax point on or after October 1st 2019 will be subject to the new domestic reverse charge rules.

Why Is HMRC Doing This?

HMRC have implemented the ‘reverse charge’ rule as an anti-fraud measure to prevent potential ‘dodgy’ suppliers from absconding with the VAT they have collected.

HMRC have already deployed the rule successfully in the telecoms industry as a means of preventing carrousel fraud or ‘missing trader fraud intercommunity fraud’ (MTIC).

HMRC and the government have calculated that by the end of the 2023/24 tax year, the new initiative will have collected more than £495m in tax revenues that would otherwise have been lost to the public purse.

When Does It Apply?

The reverse charge will apply all the way along construction industry supply chain up until the point where the customer receiving the supply is no longer considered a business supplying specified services. These businesses/individuals are referred to as the ‘end-user(s)‘.

Services Covered Under CIS

Construction services covered by the reverse charge (the ‘specified services’) are those falling within the definition of ‘construction operations’ under CIS.

GOV.UK provides a list of the following activities that are covered under CIS:

  • A permanent or temporary building or structure;
  • Civil engineering work, e.g. roads and bridges;
  • Site preparation, e.g. the laying of foundations and the provision of access works;
  • Demolition and dismantling;
  • Building work;
  • Alterations, repairs and decorating;
  • The installation of systems for heating, lighting, power, water and ventilation;
  • Post-construction cleaning work inside of buildings.

Services Not Covered Under CIS

Some services are excluded from the reverse charge. For example:

  • Professional work carried out by surveyors, architects or consultants in the building industry;
  • Acquisition and delivery of machinery;
  • Natural gas/oil drilling/extraction activities;
  • Installation of security systems which include closed-circuit television and burglar alarms.


The reverse charge will not bring businesses that supply specified services to connected parties within a corporate group structure or with a common interest in land within scope.

In such circumstances, standard VAT accounting rules apply.

Definition of ‘Deemed Contractors’

While these obligations only apply to those operating in the construction industry, non-construction businesses can be treated as ‘deemed contractors’. Under CIS rules, deemed contractors will be required to report payments if their average annual construction-related expenditure exceeds £1 million over a three-year period.

The obligations are designed to throw a net around those businesses with a significant spend on construction activities such as large retailers and public bodies.

What Needs To Be Done?

By October 1st, businesses operating within the construction industry will need to establish whether they are affected by the reverse charge.

If they indeed decide they affected, then they will need to consider the following:

  • Are they affected in respect of sales, purchases or both?
  • Are their accounting systems and software ready to deal with the reverse charge?
  • What is the potential impact on their cash flow?
  • Are there any additional training requirements for staff?

When settling an account, the VAT-registered customer must:

  • withhold the VAT element of their liability (the reverse charge);
  • account for the VAT withheld to HMRC on its VAT return.


The customer retains the ability to recover the associated input VAT incurred on the same VAT return, subject to standard VAT rules.

In summary, by September 30th:

  • Contractors should review their contracts with sub-contractors to decide whether the reverse charge If it applies, then they should notify their suppliers immediately;
  • Sub-contractors will need to contact their customers to establish if the reverse charge applies. They will also need to determine whether their customer is an end-user or intermediary supplier.


The reverse charge does not apply to consumers or final customers of building and construction services.

Any consumers or final customers who are registered for VAT and CIS will need to ensure their suppliers do not apply the reverse charge on services supplied to them.

Intermediary Suppliers

Intermediary suppliers are VAT, andCISregistered businesses that are considered connected or linked to end-users.

To be considered ‘connected’ or ‘linked to’ end-users, intermediary suppliers must either:

  • share a relevant interest in the same land, where the construction works are taking place, or;
  • be part of the same corporate group or undertaking, as defined in section 1161 of the Companies Act 2006.

If several connected businesses are collaborating to purchase construction services, they are all treated as if they are end-users, and the reverse charge does not apply to their purchases. For example:

  • A property-owning group may buy construction services through one member of the group and recharge those services to either other group companies, their tenants, or both.
  • All the members of the property-owning group and their tenants will be considered end-users, and the reverse charge will apply.

Don’t Underestimate the Impact

You should be under no doubt that from October 1st, the domestic reverse charge will have a significant impact on cash flow management for sub-contracting businesses that are affected by this new rule.

Smaller sub-contractors should pay particular attention since historically smaller sub-contractors have relied on the VAT element of contract payments received to fund their short term cashflow needs.

While in essence, a business is free to use VAT that it has collected as working capital, HMRC would prefer for it to be ringfenced and held on deposit until payment of the related VAT has been made.

Irrespective of your view on the appropriateness of a business using government monies to fund their working capital requirements, as of October 1st, this interest-free source of funds will be withdrawn.

Calls for Delay

With the emphasis on businesses meeting compliance requirements for MTDfV, until recently, there has been scant information regarding its poor relation, the reverse charge. Consequently, there is an ongoing concern amongst those in the know that the construction industry will not be ready on time.

In an attempt to draw attention to this lack of readiness, the Chartered Institute of Taxation (CIOT) wrote to HMRC in early August and published a press release calling for the launch to be postponed until April 2020. This would enable the 150,000 affected CIS to prepare for this significant change in accounting for VAT.

Light Touch

In response, HMRC says it recognises the difficulties around implementing the new rules. In response, it has announced that it will apply a ‘light touch’ in dealing with related errors during the first six months.


When supplying a service subject to the domestic reverse charge, suppliers must:

  • show all the information required on a VAT invoice;
  • make a note on the invoice, clearly indicating that the domestic reverse charge applies and that the customer is required to account for the VAT;
  • clearly state how much VAT us due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but that VAT should not be included in the amount charged to the customer.

Where software is used to produce invoices and the system cannot show the amount of VAT to be accounted for under the reverse charge, then the invoice should clearly indicate that VAT is to be accounted for by the customer at the appropriate rate, based on the VAT-exclusive selling price for the reverse charge goods or services.

Authenticated Tax Receipt and Self-billing Invoices

Authenticated tax receipts or self-billing invoices must:

  • show the supplier’s name, address and VAT registration number (as well as the usual VAT invoice details);
  • contain the self-billed invoice with the self-billing reference;
  • clearly state the amount of VAT due under the reverse charge, or the rate of VAT if the VAT amount cannot be displayed.

Determining Reverse Charge Treatment of Existing Contracts by The Deadline

In the run-up to the October 1st deadline, businesses with a large number of active contracts that engage sub-contractors at a variety of sites may find it difficult to establish whether or not the reverse charge applies.

For example, a construction group may be considered a property developer on some sites and a building contractor on others, therefore, their status could change.

To avoid uncertainty and delay to payments while each contract is being checked, HMRC has determined that it will be easier for one accounting treatment to be applied to all contracts with a particular sub-contractor.

For example, if a contractor determines that the reverse charge applies to more than 5% of contracts (by volume or value) after examining all its construction contracts with a particular subcontractor, then the reverse charge may be applied to all the contracts.

Switching to Monthly VAT Returns

HMRC acknowledges:

“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 (their VAT return is a net claim from HMRC instead of a net payment).

Repayment traders can apply to move to monthly returns to speed up payments due from HMRC.”

Asking Customers About End-user or Intermediary Status

If in doubt and where a supplier intends to make a supply, they should ask the customer if they are an end-user or intermediary supplier, ensuring they keep a record of the customer’s answer.

It will be up to the customer to make the supplier aware that they are an end-user or intermediary supplier, and that VAT should be charged in the usual way instead of being subject to a reverse charge.

Sometimes it may be evident that the customer is an end-user. For example, if there is a repeat contract, it will be deemed acceptable for you to charge VAT in the usual way.

Examples of end-users include UK VAT-registered mainstream or deemed contractors. Under CIS rules:

  • They are typically not construction businesses and are found in the retail, manufacturing, utilities and property investment sectors as well as public bodies.
  • Property developers should also be end-users in cases where they do not make onward supplies of building or construction services.
  • Intermediary suppliers can call themselves end-users in all communications and should be in writing (either digitally, or on paper).

HMRC also acknowledges:

“There is no set wording, but this is an example of suitable wording:

We are an end-user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.”

If the reverse charge treatment depends on the customer’s end-user status, and the treatment adopted is found to be incorrect (for example, because the customer is an end-user but has not provided written confirmation resulting in the reverse charge being applied incorrectly) HMRC will expect the customer to notify the supplier that it is an end-user and request a corrected invoice.

In the case of self-billing, a new invoice will have to be issued, and the VAT will have to be paid to the supplier.

Verifying the VAT Status of Customers

Before applying the reverse charge, a supplier must be satisfied that a customer is VAT-registered. Presently, this can be done via the European Commission website.

Verifying a Customer’s CIS registration

It is not necessary to verify the CIS registration of existing customers. If a business holds such evidence, then that evidence should be retained as part of the VAT record. With respect to all new customers, confirmation of registration or a copy of their CIS should be obtained and retained.

Change of VAT Treatment During A Contract

There are occasions during a contract when a customer no longer retains an interest in the land concerned, or a property developer sells a partly completed building but carries on supplying the construction services to the new owner to complete the building.

Where this happens, a customer should notify the supplier that the end-user exclusion no longer applies, and charges for services in future would be subject to reverse charge.

The new treatment will be considered to apply at the point the customer’s circumstances are deemed to have changed.

If this change happens during an invoice period (where there would be one invoice including both reverse charge and standard VAT rules), the supplier can opt to change to the new treatment for the entire invoice period, or wait until the next invoice period before switching to the new treatment.

Transitional Supplies for Authenticated Tax receipts or Self-billed Invoices

For authenticated tax receipts or self-billed invoices, the tax point is usually the date the supplier receives payment.

The transitional arrangements for how the VAT treatment is determined are as follows:

  • For transactions recorded by October 1st, and paid by December 31st, the standard rules apply.
  • For transactions recorded by October 1st, but not paid by December 31st, the domestic reverse charge rules apply.
  • For transaction recorded on or after October 1st, domestic reverse charge rules apply.

Cash Accounting Scheme

The Cash Accounting Scheme cannot be used for the supply of services that are subject to the reverse charge. However, under the reverse charge, no VAT is actually paid by customers to suppliers, so there will be no additional adverse cash flow impact.

The Cash Accounting Scheme can still be used for supplies that are not within the reverse charge. However, as a business will have to pay cash out to make a claim, the scheme may no longer help.

Flat Rate Scheme (FRS)

Reverse charge supplies are not to be accounted for under the FRS scheme. Therefore, users of the scheme will have to consider if it is still beneficial to them when VAT is not being paid to them on some or all of the invoices they issue.

Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC.


This article only provides the key highlights of the change, and you should be aware of the specific details by visiting the HMRC’s site, which has a helpful section dedicated to ‘VAT: domestic reverse charge for building and construction services’ guidance.