Domestic VAT reverse charge on construction industry labour

There will be VAT invoicing changes for construction services from October 2019.



Missing trader fraud is an organised criminal fraud on the VAT system. Construction services have been targeted by criminals because some suppliers that do not incur significant VAT bearing costs, charge VAT to their customers and then go missing , keeping the VAT for themselves.


In order to prevent a significant risk to the exchequer, HMRC has introduced a new measure to combat missing trader VAT fraud in construction sector labour supply chains.


It is intended that the new rules will be effective from 1st October 2019.


Further to initial consultation in 2017, HMRC has now published draft legislation and explanatory notes which are available at this link Reverse Charge for construction services. HMRC has asked for comments before 20 July 2018. It is intended a final version of the draft order and guidance will then be published before October 2018.


Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the construction sector will not be invoiced in the normal way.  The main contractor accounts for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position.


The reverse charge will not apply to supplies of construction services made to a customer that is not a VAT-registered businesses in the construction sector.


There is no de minimis (minimum) limit for Reverse Charge and therefore the main contractor will apply this mechanism on every supply he receives from the sub-contractor.


What type of work will be affected?


Even though legislation uses the word “construction”, the Reverse Charge is not limited to construction services only. It will be applied to construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, foundation works.



Excluded works


Some works will not be covered by this change and therefore, they continue to invoice in normal way. These include


  • the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape;
  • drilling for, or extraction of, oil or natural gas;
  • extraction (whether by underground or surface working) of minerals and tunnelling or boring, or construction of underground works, for this purpose;
  • manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site;
  • manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site;
  • the making, installation and repair of artistic works, being sculptures, murals and other works which are wholly artistic in nature;


A detailed list of the work included and excluded is available at this link Services affected by the changes.


The idea of having draft legislation and guidance by October 2018 is to allow businesses 12 months in which to make the necessary changes to systems, prior to implementation on 1 October 2019.


Affected businesses will need plans in place to ensure that as suppliers they do not charge VAT incorrectly, or as recipients, they apply the Reverse Charge correctly. Failure to operate the Reverse Charge correctly could lead to error penalties.


Please stay connected with Garbutt + Elliott blogs and we will keep you updated with the changes. For any VAT queries please contact Alex Millar or Naveen Sahney.