HomeFWJ TakeawayResourcesHow Asset-Based Lenders Can Prepare for the Domestic Reverse Charge for Building and Construction Services

On 1 October 2019, the VAT domestic reverse charge is being introduced under the Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order 2019.

In preparation for the change, discounters should review all facilities provided to businesses that supply construction services to establish whether the reverse charge applies and whether amendments are required to their clients’ invoicing and accounting systems. This will involve checks of the VAT and CIS status of each client’s customers (if necessary, approaching customers to confirm their VAT status). If in doubt as to whether the reverse charge applies, discounters may opt to make a reserve against availability for the amount of the VAT until the position is clarified.

What is the reverse charge?

The reverse charge is a mechanism designed to avoid the practice of some suppliers who charge and collect VAT from their customers failing to account for that VAT to HMRC.

Under the Order, the normal VAT rule that a supplier charges, receives and accounts for VAT is modified so that the recipient of the supply (the end customer) is required to account for VAT on the transaction instead of the supplier.

Which construction supplies are affected?

The reverse charge will apply to business-to-business supplies of “construction services”, namely the same services which are caught by the Construction Industry Scheme (“CIS”), subject to certain exceptions. Accordingly, the following are construction services:

  • Constructing, altering, repairing, extending, demolishing and dismantling of buildings, structures and works forming (or to form) part of the land, such as walls, roads and power lines.
  • Installing heating, lighting, air-conditioning, drainage and other systems.
  • Painting or decorating the outside or inside of a building.
  • Preparatory work, such as cleaning, site clearance, earth moving excavation, laying foundations and erecting scaffolding (with labour).

Who is excluded?

There are certain exceptions when the VAT reverse charge will not apply, notably:

  • Services excluded from the definition of “construction services” (including the manufacture of building, engineering, heating, lighting, air-conditioning or drainage components, professional services of architects, surveyors or consultants and the installation of security systems), though to the extent that any excluded services form part of a single supply that includes construction services, the excluded services will be treated as construction services.
  • Excepted supplies, which includes contractors who are not required to report payment under the CIS, end users and intermediaries.

End users are businesses who use construction services for any purpose other than making further supplies of construction services, for example, supplies by building contractors to retailers and property owners and property developers who have received construction services for the purpose of selling an interest in property rather than making further supplies of construction services.

Intermediaries are recipients of construction services who make onward supplies of construction services without material alteration or further processing. Intermediaries are not within the scope of the reverse charge if either the intermediary is connected with the expected end user, for example, supplies of construction services commissioned by a group company which are supplied to another group company; or the supplies are made in relation to land, buildings or civil engineering works in which both the intermediary and the expected end user have a relevant interest, for example, where a landlord or tenant commission construction services and supply those services to the other.

HMRC guidance states that employment businesses that supply construction workers are not likely to be supplying construction services for the purpose of VAT.

What are the implications for asset-based lenders?

Asset-based lenders who provide funding to businesses in the construction industry will need to consider the implications of the reverse charge on their funding arrangements. In particular:

  1. Suppliers, such as building sub-contractors, who currently raise capital to finance projects through debt, may be affected by this Order as VAT will no longer be included in their debt figures. Discounters should only approve the net debt (exclusive of VAT) for funding because the VAT will no longer be payable to the sub-contractor. This may result in cash flow issues for such sub-contractors due to the dilution in the gross value of the recoverable debt and the consequent reduction in the value of debts approvable for funding.
  2. Discounters will need to identify:
    (a) clients who are suppliers of construction services and are subject to the reverse charge mechanism; and
    (b) customers of clients who are outside the scope of the reverse charge because they are receiving excluded services or excepted supplies.
  3. Discounters will need to ensure that their clients who are subject to the reverse charge alter their invoices so that they show all the information normally required to be shown on a VAT invoice, including the amount of VAT due, and annotate the invoice to make it clear that the reverse charge applies and the customer is required to account for the VAT to HMRC. Such clients will need to update their accounting systems before October to ensure that they are ready to process the new format of invoices.
  4. There is a risk that a supplier incorrectly charges VAT when the reverse charge applies. This could result in overfunding if the customer refuses to pay the VAT (though the discounter would have recourse against the supplier for the relevant amount) and the supplier will be under an obligation to repay any VAT collected from the customer. If the customer pays the VAT to the discounter, the discounter could potentially be liable to refund the VAT to the customer.

When does the charge take effect?

The Order will be effective as of 1 October 2019. The new rules will apply to discounting facilities entered into prior to this date as there are no transitional provisions.


On 6 September 2019 HMRC announced that it would be postponing the implementation of the reverse VAT charge for a year until 1 October 2020, to help businesses, “and give them more time to prepare.”  It also noted that this would “also avoid the changes coinciding with Brexit.”

In the intervening year HMRC “will work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses will be ready for the implementation date.” 

HMRC also noted that it recognises that some businesses which have already changed their invoices to comply with the reverse charge may not be able to easily amend them again and that it will “take into account the fact that the implementation date has changed” if genuine errors do occur.

Businesses caught by the reverse VAT charge have welcomed HMRC’s postponement as this will give them an opportunity to prepare effectively.


For further information about how you can prepare for the domestic reverse charge, contact partner Chris Willison or your usual adviser at Francis Wilks & Jones.

The contents of this note are not intended to serve as legal advice and should not be considered as a substitute for taking legal advice.

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