Guidance: VAT domestic reverse charge technical guide

If you buy or sell services in the Construction Industry Scheme, you can find more information about it in this guide.

End user

If you’re an end user you’re a business, or group coof businesses, that:

• are VAT and Construction Industry Scheme registered
• do not make onward supplies of the building and construction services that you receive

Building contractors are not usually end users because they make onward supplies of construction services. There will not always be an end user (for reverse charge purposes) in each construction supply chain.

For example, if services are provided to a private domestic customer, the reverse charge does not apply because the customer will not be VAT registered. This does not mean that the contractor supplying the householder becomes the end user because it will still be making onward supplies of construction services. Supplies made to them by sub-contractors will therefore still be subject to the reverse charge if the other conditions are met.

The reverse charge does not apply for supplies to end users when the end user tells their supplier or building contractor in writing that they’re an end user. Once an end user notification has been made it is not necessary for the contractor to ask for any further details like VAT and Construction Industry Scheme registration status.

Where a business customer receives construction services and is predominantly an end user, but may be re-supplying a very small proportion of the services received (less than 5% by value), this would normally trigger an obligation to apply the reverse charge. But there is a 5% disregard which allows the business customer to still issue an end user declaration to their supplier. They do not have to disclose the details of those re-charges to the supplier. For more information on this you can check the section ‘Construction services supplied with goods or other services.’

Intermediary suppliers

Intermediary suppliers are VAT and Construction Industry Scheme registered businesses that are connected or linked to end users.

If you buy construction services and re-supply them to a connected or linked end user, without making material changes to the supplies, you can be treated as an end user and the reverse charge does not apply.

To be connected or linked to an end user, you must either:

• have a relevant interest in the same land where the construction works happen — such as a landlord and tenant
• be part of the same corporate group or undertaking — as defined in section 1161 of the Companies Act 2006 on the government legislation website

The reverse charge does not apply for supplies to intermediary suppliers where they tell their supplier this in writing. Once an intermediary supplier notification has been made it is not necessary for the contractor to ask for any further details like VAT and Construction Industry Scheme registration status.

Intermediary suppliers can refer to themselves as end users when notifying their suppliers.

If there is an intermediary supplier and end user in a supply chain

The intermediary supplier and the end user do not need to apply the same VAT treatment in relation to the reverse charge.

Example

A landlord buys construction services and supplies the services to the tenant (the end user). The tenant may choose not to notify its end user status in writing and just account for VAT using the reverse charge. The landlord would still be entitled to take advantage of the intermediary supplier exemption by issuing written notification of its status to its supplier, who should then charge VAT to the landlord under normal rules.

Choosing to be an end user

Being an end user is optional but in order to be treated as one the customer must tell the supplier or building contractor in writing that they are an end user. Only once the notification is made can the supplier stop applying the reverse charge and charge VAT under normal rules. It is optional so there is no legal obligation to be treated as an end user.

Supplies to possible end users

If you’re a supplier, and you believe your customer is an end user but they have not notified you in writing, you should still apply the reverse charge rather than charge VAT under normal rules — if the customer is VAT and Construction Industry Scheme registered.

You can write to your customer to ask them to confirm they’re an end user or an intermediary supplier, but there is no legal obligation for them to be treated as an end user or intermediary supplier. If they do not confirm their end user status in writing and the supplies meet the conditions you must account for VAT using the reverse charge.

You can read Construction Industry Scheme: CIS 340 to help you decide if you’re a contractor or sub-contractor within the Construction Industry Scheme.

Snagging works and the reverse charge

Snagging works are remedial works to correct faulty workmanship or replace faulty materials.

Design and build companies as intermediary suppliers

Under a design and build contract, the design and build company will both:

• buy in building and construction services from multiple suppliers
• offer those services as a single supply to the client of a designed and built building

If the conditions to be an intermediary supplier are met, the design and build company is not treated as carrying out material alteration or processing of the services it buys in. This means it can be treated as an intermediary supplier of building and construction services. This also includes supplies such as scaffolding which are integral to the design and build but are not supplied onwards.

A design and build company can be a connected party or linked to an end user. Normal VAT rules would then apply to supplies bought in.

If the design and build company is not a connected party of or linked to an end user, it will not be regarded as an intermediary supplier. So the reverse charge will apply to construction services bought in for onward supply.

Making written notification

If you’re an end user or intermediary supplier you can make written notification to your supplier or building contractor:

• by post
• by email
• in a contract

You should keep this as part of normal business records and make clear what supplies are covered.

Contracts can be any of the following:

• for specific supplies
• a Heads of Agreement
• call-off type contract — for supplies that are to be made at a date in the future

If the notification is in a contract issued by the supplier, this will be valid if customer gives written agreement to the contract.

Once written notification has been given there is no need to re-issue it if the customer changes from an:

• end user to an intermediary supplier
• intermediary supplier to an end user

If a written notification is not made correctly the customer will be liable for accounting for the VAT that should have been charged under the reverse charge.

To notify your customer that you are an end user or intermediary supplier you could use the following wording:

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

When to check if your customer is VAT and Construction Industry Scheme registered or an end user

Where sales operations or networks are clearly set for domestic consumer sales it’s not necessary to check the VAT, Construction Industry Scheme or end user status of the customer and the normal VAT rules should apply. Otherwise, you should always ask the customer whether they’re registered for VAT and Construction Industry Scheme and whether or not they’re an end user.

You can include a statement in your terms and conditions to say you’ll assume that your customer is an end user or intermediary supplier unless they say they’re not. This places a responsibility on the customer to respond if this is not the case.

Employment businesses supplying construction workers

Employment businesses are treated differently for the purpose of the reverse charge.

Supplies by employment businesses are not subject to the reverse charge, even if those supplies are within the scope of the Construction Industry Scheme.

Employment businesses supplying construction workers are, for VAT purposes, treated as supplying staff rather than building and construction services.

For VAT purposes, such activities of workers are supplies of staff by their employer and not supplies by the workers themselves. The supplier makes a supply of staff for VAT purposes if it provides another person with the use of an individual who is:

• contractually employed or otherwise engaged by the employment business
• a director of the employment business

A similar situation arises with joint ventures. The construction firms that are parties to the joint venture provide workers on secondment to work on the joint venture project. Payments by the joint venture to each construction firm for their staff is not payment for construction services and therefore not subject to the reverse charge.

Labour only sub-contractors

The reverse charge applies to the services supplied by labour only sub-contractors. The labour only sub-contractor is responsible for the works carried out and therefore subject to the reverse charge. This applies if the services provided are:

• standard-rated
• reduced rated
• within the scope of the Construction Industry Scheme

A supply of labour only construction services is subject to the reverse charge but a supply of staff is not.

Difference between employment businesses and labour-only sub-contractors

Supplies by labour only sub-contractors are subject to the reverse charge if the supplies are within the scope of the Construction Industry Scheme and all the other conditions are met.

The supplies made by the employment business are not subject to the reverse charge even if those supplies are within the scope of the Construction Industry Scheme.

The supplying business should be treated as an employment business if these apply:

• the customer contacts the employment business and asks for a number of workers over a number of days
• the employment business provides an hourly or daily rate for the workers
• a timesheet is used to record the hours and days worked
• the customer sends the signed timesheet agreeing the hours and days worked to the employment business
• the customer pays the employment business
• the customer is responsible for the works carried out and for correcting any defects

The supplying business should be treated as a labour only sub-contractor if these apply, the:

• customer contacts a business and asks for a skilled labourer (for example, a bricklayer, electrician or plumber) to carry out specified services
• business provides a price for the works or agrees a measured rate per square metre
• supplying business is responsible for the labourer’s works
• supplying business is responsible for correcting any defects following completion of the works
• customer, or its representatives, agrees that the work has been carried out or certifies payment for the value of works carried out to date

The reverse charge applies to the services supplied by the business (if those services are within the scope of Construction Industry Scheme) and VAT should not be charged on the invoices.

If there is a supply of construction services in a supply chain it cannot then turn into a supply of staff at a later point in the same supply chain.

A supply of construction services will have certain characteristics which cannot be changed.

If the initial supply is for the completion of agreed work by a sub-contractor, this cannot later be re-supplied as a supply of staff. This is because this is a supply of a completely different nature (bringing individual workers under the direct control and supervision of the customer). However, the opposite situation will happen where building contractors buy in supplies of staff to help them in making their onward supplies of construction services.

Making errors with the domestic reverse charge

HMRC understands that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation. As long as you were trying to comply with the new legislation and have acted in good faith.

Any errors should be corrected as soon as possible. The longer the under declared or overcharged sums remain outstanding the more difficult it may be to correct or recover them.

HMRC officers may assess for errors during the light touch period, but penalties will only be considered if you are deliberately taking advantage of the measure by not accounting for it correctly.

Impact on cash flow and monthly returns

The reverse charge may also mean your business will make net repayment claims to HMRC, as you will not receive VAT on payments from your customers.

You can apply to move to monthly returns using your online VAT account.

If you are a sub-contractor, your customers will not be paying you VAT, which will reduce the gross value of payments coming into your business. You’ll need to consider and plan for the impact of this on your day-to-day cashflow.

Construction services supplied with goods or other services

If goods are supplied with construction services this is a single supply for VAT purposes. The reverse charge applies to the full value of the invoice. There are some concessions outlined in the following section.

Supplies where the reverse charge element is a minor part

Normally if any of the services in a supply are subject to the reverse charge, all other services supplied will be also. If the reverse charge part of the supply is 5% or less of the whole supply value this can be disregarded (this is referred to as the ‘5% disregard’). Normal VAT rules will apply if the customer makes an end user or intermediary supplier notification.

The 5% disregard applies wherever there is a single supply of construction services and only one minor element of the supply would fall under the reverse charge such as in ‘supply and fix works’.

Supply and fix works will normally be subject to the reverse charge because the services and goods are part of one supply of construction services for VAT purposes. However, if the value of the service element is 5% or less, the 5% disregard can apply and VAT can therefore be accounted for under normal rules. For example, a joiner constructing a staircase offsite, then installing it onsite, will be making a reverse charge service unless the value of the charge for installation is 5% or less of the overall charge.

Also, if 2 parties have already had a reverse charge service between them on a construction site, for convenience they can both agree that any more construction supplies on that site can be treated as reverse charge services.

When the 5% disregard does not apply

The 5% disregard does not apply where there is a single supply and the predominant element is zero-rated. For example the construction of a new build block of flats with a small element of commercial premises.

You should check when you must use the VAT reverse charge for building and construction services.

Separate contracts for labour and materials

If a customer enters into 2 separate contracts with the same supplier, one of the contracts is within the scope of the Construction Industry Scheme, and the contracts are linked, with both to be carried out on the same site, the reverse charge will apply to both contracts (subject to the 5% disregard) as they comprise a single supply for VAT purposes.

Charges for labour, together with the materials supplied in the course of the supply of labour, should not be separated to avoid applying the reverse charge to the supply of materials.

Splitting of invoices for supply and fix orders

If a customer places a single supply and fix order within the scope of the Construction Industry Scheme with a supplier, the reverse charge will apply to the full value of the order even if the supplier issues separate invoices for the supply and fix elements.

The Single supply concept applies only in relation to VAT and not to the Construction Industry Scheme. We look at each order separately under Construction Industry Scheme rules, so any separate order for the supply of materials or the hire of plant will not be subject to the Construction Industry Scheme. But for VAT purposes the materials or hire (with labour) are treated as one overall supply, subject to the same VAT treatment.

Applying the 5% disregard

The 5% disregard only applies where both the supplier and customer (sub-contractor and contractor) agree, from the start of the contract, that it should apply on the basis of the overall contract values (for example, the contracted value of reverse charge supplies being less than 5% of the total contract value). The 5% should not be calculated on an invoice by invoice basis.

Supply of spares after completion of a supply and fix contract

When a supply and fix contract is completed, if the original contract:

• did not provide for the supply of spares this is a materials-only supply outside the scope of the Construction Industry Scheme — therefore, normal VAT rules apply and VAT should be charged by the supplier on the sale of spares
• included the supply of spares and the original contract is subject to the reverse charge the supply of spares will also be subject to the reverse charge and VAT should not be charged by the supplier on the sale of spares — if the original contract was to an end user the reverse charge will not apply

Change of VAT treatment during a contract

There may be contracts where a change in customer circumstances means the VAT treatment changes from the reverse charge to the normal VAT accounting rules or the other way round.

Where this occurs, the customer must notify the supplier to enable the correct VAT treatment to be applied.

The new treatment will apply at the point the customer’s circumstances changed.

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

How to account for the reverse charge

VAT is due when a VAT invoice is issued, or payment is received, whichever is earlier (this is called the tax point).

For invoices issued for supplies that become liable to the reverse charge, the VAT treatment for invoices with a tax point:

• before 1 March 2021 ― the normal VAT rules will apply and you should charge VAT at the appropriate rate on your supplies
• on or after 1 March 2021 — the domestic reverse charge will apply

Transitional supplies for authenticated tax receipts or self-billed invoices

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

The transitional arrangements for how to determine the VAT treatment for payments due on any supplies entered into your accounting system is if the date entered is:

• before 1 March 2021 and the payment date will be on or before 31 May 2021, use the normal VAT rules
• before 1 March 2021 and the payment date will be on or after 1 June 2021, use the domestic reverse charge
• on or after 1 March 2021, you must use the domestic reverse charge

Completing your VAT Return

VAT on sales

Suppliers must not enter any output tax on sales under the reverse charge. The supplier only needs to enter the net value of the sale.

VAT on purchases

If you buy services subject to the reverse charge, you must add the VAT charged to the output tax total on your VAT Return.

Do not enter the net value of the purchase as a net sale.

You may reclaim the input tax on your reverse charge purchases, subject to the normal VAT rules.

Cash Accounting Scheme

You cannot use the VAT Cash Accounting Scheme for supplies or services you buy or sell that are subject to the reverse charge.

You can continue to use the scheme for any supplies that are not subject to the reverse charge.

Accounting for payments made or received

Some businesses in the construction sector prefer to account for their VAT on the basis of payments made and received, for example, sub-contractors often do not issue VAT notices in advance of receiving payments.

If you do issue VAT invoices for non-Domestic Reverse Charge supplies in advance of receiving payment, then you must account for any VAT due based on the date the invoice is issued unless you have formally opted to use the Cash Accounting Scheme.

You cannot use the Cash Accounting Scheme for reverse charge supplies made or received. But businesses can still stay on the scheme and use it for non-Domestic Reverse Charge transactions if they wish to do so.

The reverse charge has introduced the following changes.

Sales

For sales, no VAT will be due on payments from customers where the supply is covered by the reverse charge.

All you need to do is include the value of the sale in your VAT Return when you receive the payment.

If you supply services that are not subject to the reverse charge, for example to private individuals or end users, you must account for VAT on the dates you were paid.

Purchases

If you receive a service subject to the reverse charge from sub-contractors you’ll have to account for the VAT in your VAT Return and recover it simultaneously on the same VAT Return, subject to the normal rules on VAT input tax deduction.

You can account for this on the date you make the payment to your sub-contractor, unless they have issued you with a tax invoice beforehand, in which case you should account for the VAT using the date of the invoice.

Flat rate scheme

Reverse charge supplies are not to be accounted for under the scheme. Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC and recover it at the same time on the same VAT Return.

Flat Rate Scheme users who make supplies under the reverse charge should exclude the value of those supplies from their Flat Rate Scheme calculation.

Users of the Flat Rate Scheme who make supplies covered by the reverse charge will have to consider if the scheme is still useful, given that under the scheme they cannot recover VAT incurred on purchases of materials, and overheads.

Invoices and other VAT documents

Invoices

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 to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT
• clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but the VAT should not be included in the amount charged to the customer

The VAT regulations 1995 say invoices for services subject to the reverse charge must include the reference ‘reverse charge’.

Here are examples of wording that meet the legal requirement, reverse charge:

• VAT Act 1994 Section 55A applies
• S55A VATA 94 applies
• Customer to pay the VAT to HMRC

Invoice example (ODT, 8.27 KB)

If your accounting software cannot show the reverse charge

If your software cannot show the amount of VAT to account for under reverse charge, you must:

• add wording to the invoice to say ‘customer to account to HMRC’ for the reverse charge
• make sure customer can identify reverse charge goods or services

Credit notes and adjustments

Adjustments in the course of business

You can apply the reverse charge and not adjust the original VAT charge if you allow a credit to a customer who can reclaim all the tax on their supply as input tax and they agree to this approach.

If these conditions are not met you’ll need to make the adjustments detailed in the section about suppliers.

Suppliers

Issue a credit note to the customer with a note on it to show that the reverse charge applies and showing the reduction in the VAT the customer has to pay to HMRC.

Here are some examples of wording you can use for credit notes:

• reverse charge: customer to account for the output tax adjustment of £X to HMRC
• customer to account to HMRC for the adjustment to reverse charge output tax on the VAT exclusive price of items marked reverse charge (use this if the VAT amount cannot be shown)

Include the reduction in the value of the supply on the VAT Return for the period in which the credit note is issued.

Customers

Adjust the amount of output VAT due (as shown on the supplier’s credit note) by reducing the total VAT due in the VAT Return for the period in which the credit note was issued.

Adjust the amount of input VAT in the same VAT Return, in accordance with any input tax adjustment calculations that apply (for example partial exemption methods).

Include the reduction in the value of the supply in the VAT Return for the period in which the credit note is issued.

If the original supply was accounted for under a self-billing or authenticated receipts system then it will be for the customer rather than the supplier to generate the credit note, but otherwise the same procedure will apply.

If you’ve not submitted your VAT Return

If you identify a change in the value of reverse charge services before your accounting period is closed, you can adjust your primary records of the sale or purchase and make sure the corrected figure feeds through to the VAT account.

Credit notes spanning the transition period

With the introduction of the reverse charge on 1 March 2021, if a supplier issues a credit note to reduce the value of, or cancel, an invoice issued before 1 March 2021 the VAT procedures set out in the following scenarios will apply.

Scenario 1

Where a sales invoice is issued before 1 March 2021 with 20% VAT and a credit note is issued on or after 1 March 2021 to reduce the value of the supply, then if:

• both parties are fully taxable (for instance, can recover in full VAT incurred on purchases) and agree the credit note may be issued without a VAT adjustment
• either of the parties is not fully taxable or the parties want to adjust the VAT previously charged, the credit note should be issued with 20% VAT — this should be done using normal VAT accounting procedures rather than the reverse charge procedure

Scenario 2

Where a sales invoice is issued before 1 March 2021 with 20% VAT, a credit note is issued on or after 1 March 2021 for the full value of the invoice and a new invoice issued for the amount now chargeable. The credit note should then be issued with 20% VAT (normal VAT accounting procedure) and the new invoice should be subject to the reverse charge.

New build housing

The reverse charge does not apply to standard-rated items which are included in a zero-rated supply of building and construction services, for example the supply and incorporation of ovens and hobs.

If you supply standard-rated services for new build housing, the reverse charge will apply. If your customer is an end user and confirms this to you in writing, the reverse charge will not apply and you should use the normal VAT rules.

You can find more information about in the section ‘Zero rating the construction of new buildings’ in VAT Notice 708 (buildings and construction).

Supply and fix of goods not ordinarily incorporated in new build housing

The standard-rate of VAT is due on the value of goods not ordinarily incorporated in new build housing.

When these goods are supplied and installed in new build housing, the reverse charge does not apply and standard rate VAT should be charged.

Hire of plant or machinery with an operator used on new build housing developments

The supply of operated plant or machinery used on new build housing developments is zero-rated and not subject to the reverse charge.

Supply and fix of goods not ordinarily incorporated in residential conversions and refurbishments

Building and construction services may be liable to the reduced rate of VAT if the:

• refurbishment or renovation of residential premises has been empty for more than 2 years
• conversion of premises from non-residential to residential use; and works that result in a change to the number of dwellings in a building

The standard rate of VAT is due on the supply and fix of goods that are not ordinarily incorporated in residential conversions and refurbishments, and the reverse charge applies. Read section ‘Examples of articles not ordinarily incorporated’ VAT Notice 708 (buildings and construction) for more information. However, if your customer notifies you in writing that they are an end-user, normal VAT rules apply.

Scaffolding

Scaffolding on zero-rated new build housing

For scaffolding supplied for zero-rated construction work the services of erecting and dismantling scaffolding can be zero-rated. Charges for the hire of scaffolding are not covered by the zero rate and are liable to VAT.

The VAT liability of any supply of scaffolding will depend on what is being supplied under the contract in each case.

The hire of goods on its own is not a service that is covered by the reverse charge. Any VAT due on the hire of scaffolding for new build housing work should be accounted for under normal VAT rules.

A contract for the hire, erection and dismantling of scaffolding is within the scope of the Construction Industry Scheme. If the scaffold supplier’s invoice shows separate charges for the hire of scaffold and the cost of the labour to erect and dismantle it, the labour element will be VAT zero-rated as a service carried out in connection with the construction of new build housing.

The reverse charge does not apply if the scaffolding is supplied for a zero-rated construction project.

Scaffolding for standard or reduced rated construction projects

Scaffolding supplied in relation to standard or reduced rated construction work (contracts for the hire, erection and dismantling of scaffolding for construction work) will be liable to VAT at the standard rate. This should be accounted for under the reverse charge if all the other reverse charge conditions are met — unless the customer is an end user.

If the scaffold supplier’s invoice shows a single charge for the hire of scaffold and labour, the full value of the supply is subject to the reverse charge, unless the customer is an end user.

Goods on hire only

The hire of goods only is not within the scope of the Construction Industry Scheme and therefore the reverse charge does not apply to the hire charge.

Reverse charge treatment for utilities

Utility companies are suppliers of gas, electricity, water, telephone or internet services to homes and businesses, or a business (including the corporate group) that supplies such services.

They’re likely to be regulated or working under legislation administered by the Office of Gas and Electricity Markets (Ofgem), the Water Services Regulation Authority (Ofwat), or the Office of Communications (Ofcom).

Construction services received by utility companies, will be eligible for exclusion from the reverse charge under the end user exemption, if:

• the utility company confirms to the supplier in writing that it is an end user
• the work is being carried out during construction, repair or alteration of the utility companies own assets — for example part of their own infrastructure for delivering power, water of whatever utilities they are responsible for

If a utility company charges for work to connect, disconnect, reconnect, divert, ‘make safe’ or ‘cap off’ parts of its own utility network, this work is generally not within the scope of ‘construction services’ for the purposes of the reverse charge. This is because they are not making onward supplies of construction services. Normal VAT rules will apply to any such charges.

Services provided by utility businesses which also do not fall within the domestic reverse charge include:

• provision of a connection to a utility network, or diversionary works to allow the relocation of the network
• development and construction of a private network to be owned by the utility and leased or sold to the customer
• work that is not within the scope of the Construction Industry Scheme, such as the installation of a boiler (and ancillary supplies)

Exceptions to this will be when a utility company takes on the role of contractor for particular projects such as:

• constructing, repairing or maintaining a private power or gas network for a customer
• installing full heating systems

Energy Company Obligation funding

Energy Company Obligation funding only applies to gas and electric companies.

You can meet your obligations by:

• only funding the activity
• making a supply to the customer for no payment
• making a supply to the customer for a payment

Only making a supply for payment is a supply for VAT purposes, so may be subject to the reverse charge if supplies of construction services are being provided and the other conditions are met.

Local authorities and other public bodies

The end user exclusion will usually apply to supplies to public bodies.

Most supplies will either be:

• related to works to the public body’s property and land
• provided to the public body so it can discharge its responsibilities under a special legal regime

If the public body is acting on a commercial basis, and selling on the construction service, the end user exclusion will not apply. The public body will receive a reverse charge supply and have to account for the VAT to HMRC. It will also have to establish the end user status of its customer to determine whether to charge VAT or apply the reverse charge in respect of its onward supply.

Planning gain agreements

Developers may provide many other types of goods and services free, or for a nominal charge, to the local authority or other authority under ‘section 106 of the Town and Country Planning Act 1990’ at Legislation.gov.uk or similar agreements.

These agreements are sometimes described as planning gain agreements. You can find out more about planning gain agreements under the section ‘Developers’ agreements’ in Land and property (VAT Notice 742).

Any provision of such goods and services by the developer to get a planning gain agreement in line with the law is not a supply for consideration and so no VAT is chargeable on that supply. Therefore, the developer is not making onward supplies of construction services under the agreement. It can therefore opt to be an end user for reverse charge purposes for any such supplies received from sub-contractors if the end user conditions are met.

Private finance initiative arrangements

The Private Finance Initiative (PFI) is a form of Public Private Partnership (PPP). The initiative enables public and private sectors to work more closely together by making use of private capital and expertise in the provision of public sector infrastructure and services. Private Finance Initiative and Public Private Partnership agreements between a private company and a public body are often for long periods, typically 20 to 30 years.

The Private Finance Initiative and Public Private Partnership agreement will usually provide for the private company to provide a fully maintained asset in return for payment of a unitary charge based on availability, as well as providing ad-hoc services to the public body upon request.

Unitary charge payments made by a public body under a Private Finance Initiative and Public Private Partnership agreement are not treated as payments for a supply of building and construction services. The private company is not supplying building and construction services to the public body and so is the end user of those services for the purpose of the reverse charge. All supplies of such services to the private company are subject to normal VAT rules and VAT should be charged at the appropriate rate.

If there is a separate agreement or contract between the public body and the private company for the supply of ad-hoc construction services the reverse charge will:

• not apply to supplies by the private company to the public body — because the public body is the end user
• apply to supplies of construction services to the private company because there is an onward supply of those specified services to the public body

Sale and leaseback arrangements

Under sale and leaseback arrangements, a private company takes an interest in land, constructs buildings on the site and then leases the completed buildings back to the land owner. The private company is the end user for reverse charge purposes. Therefore, normal VAT rules apply to supplies of building and construction services to the private company provided that the company notifies its end user status to its suppliers in writing.

Joint ventures

The intermediary supplier exception can apply to supplies of building and construction services made to an entity which is not the end user of those services but is ‘connected’ with the end user or who, when taken together with the end user, has a relevant interest in land. ‘Connected’ means that one party must be a ‘group undertaking’ of the other party, as defined on Legislation.gov.uk in section 1161 of the Companies Act 2006.

Landlords, lessors, licensors, tenants, lessees or licensees and any persons ‘connected’ to them have a relevant interest in land. Having an agreement for lease is also a relevant interest in land. However, having a relevant interest in land does not include temporary rights to occupy land solely to carry out building and construction services.

There are different types of joint ventures and you need to determine the type in order to determine whether that joint venture is an undertaking pursuant to section 1161 of the Companies Act 2006 and whether that joint venture can be a connected party.

Unincorporated Joint Ventures or Joint Arrangement Non-entities (JANE)

The parties to the unincorporated joint venture, known as Joint Arrangement Non-entities make different contributions through their existing structures to create a business venture or achieve a common objective. There is typically an agreement detailing the rights and obligations to each other and third parties. Profits and losses flow directly to the parties of the joint venture arrangement.

Unincorporated joint ventures or Joint Arrangement Non-entities do not meet the conditions of an ‘undertaking’ or ‘group undertaking’ in section 1161 of the Companies Act 2006 and so cannot be a connected party to an end user for the purpose of the reverse charge, unless the joint venture gives rise to a general partnership in accordance with the Partnership Act 1890.

An unincorporated joint venture or Joint Arrangement Non-entities may be an end user. For example, co-owners of land who are treated as a single person for VAT purposes.

Companies or corporations

A company or corporation is normally a private limited liability company or a company limited by guarantee.

A company or corporation can be an end user or connected with an end user for the purposes of the intermediary supplier exception provided that the conditions of section 1161 of the Companies Act 2006 are met.

Limited Liability Partnership (LLP) incorporated under the Limited Liability Partnerships Act 2000.

A Limited Liability Partnership is a body corporate with legal personality separate from that of its members. A Limited Liability Partnership can be an end user or connected with an end user for the purposes of the intermediary supplier exception provided that the conditions of section 1161 of the Companies Act 2006 are met.

A Limited Partnership (LP) formed under the Limited Partnership Act 1907

A limited partnership consists of one or more:

• persons (general partners), who are liable for all debts and obligations of the firm
• persons (limited partners), who contribute a sum or sums of money as capital, or property valued at a stated amount

Limited partners are not able to take part in the management and running of the partnership business. Only general partners make supplies for VAT purposes. A general partner can be an individual or a body corporate.

A general partner that is a body a corporate can be an end user or connected with an end user for the purposes of the intermediary supplier exception provided that the conditions of section 1161 of the Companies Act 2006 are met.

Where there are 2 or more general partners those general partners are treated like a general partnership for VAT purposes and can be an end user or connected with an end user for the purposes of the intermediary supplier exception provided that the conditions of section 1161 of the Companies Act 2006 are met.

A general partnership under the Partnership Act 1890

A partnership consists of 2 or more persons and is defined as ‘the relation which subsists between persons carrying on a business in common with a view to profit’.

A general partnership can be an end user or connected for the purposes of the intermediary supplier exception provided that the conditions of section 1161 of the Companies Act 2006 are met.

Non-established taxable persons

A non-established taxable person is a person who:

• is not normally resident in the UK
• does not have a UK establishment
• is not incorporated in the UK, if it’s a company

When a non-established taxable person makes any taxable supplies in the UK (excluding when making supplies of construction services) they must:

• register for VAT in the UK
• account for UK VAT to HMRC

If their only UK supplies are supplies of construction services to UK VAT registered customers they are not entitled to register for UK VAT. This is because the customer can account for the VAT. This is done by means of a separate reverse charge procedure referred to as the reverse charge for supplies received from outside the UK Read the section ‘Reverse charge’ in Place of supply of services (VAT Notice 741A).

Non-established taxable persons making construction supplies to a customer that is not resident in the UK

If you’re a non-established taxable person who makes supplies in the UK that are not covered by the reverse charge for supplies received from outside the UK you must register for VAT in the UK. This includes any supplies of construction services in the UK you make to customers who are not registered for UK VAT. When you’ve registered for VAT in the UK, you’ll need to apply the reverse charge to supplies of construction services that are within scope of the measure.

You can check when you must use the VAT reverse charge for building and construction services.

If you’re a non-established taxable person and only supply construction services to UK VAT registered customers you cannot register for UK VAT, it’s your customer who will need to account for the VAT using the international services reverse charge. This is referred to as the reverse charge for supplies received from outside the UK.

Read Place of supply of services (VAT Notice 741A) to find out more information about how to determine the place of supply of your services and how to deal with supplies of services which you receive from outside the UK.

Non-established taxable persons receiving construction supplies from UK suppliers

If the  non-established taxable person is registered for UK VAT and fulfils the conditions to be an end user or intermediary supplier, the reverse charge will not apply provided the  non-established taxable person notifies the UK supplier it’s an end user or intermediary supplier in writing.

If the  non-established taxable person is registered for UK VAT and is not an end user or intermediary supplier the reverse charge will apply. The non-established taxable person will have to account for VAT on their UK VAT return.

Flowcharts

If you sell building and construction services

You can use the suppliers flowchart to help you decide if you need to use the reverse charge. The reverse charge will need to be used when:

• your customer is registered for VAT in the UK
• the services supplied are within the scope of the Construction Industry Scheme
• the services you supply are standard or reduced rated
• you’re not an employment business supplying either staff or workers, or both
• your customer has not given written confirmation that they’re an end user or intermediary supplier

Do not use this flowchart for services supplied by employment businesses. You should check guidance under the section ‘Employment businesses supplying construction workers.’

Suppliers flowchart (ODT, 158 KB)

If you buy building and construction services

You can use the buyers flowchart to help you decide if you need to use the reverse charge. The reverse charge will need to be used when:

• payment for the supply is reported within the Construction Industry Scheme
• the supply is standard or reduced rated
• you’re not hiring staff or workers, or both
• you’re not using the end user or intermediary exclusions

Do not use this flowchart for services supplied by employment businesses. You should check guidance under the section ‘Employment businesses supplying construction workers.’

Buyers flowchart (ODT, 100 KB)

You cannot use the reverse charge for worker placement services supplied by employment businesses. You can find more details about employment business in Employment agencies and businesses

If you need more advice on Construction Industry Scheme treatment, you can contact Construction Industry Scheme: general enquiries or VAT: general enquiries for queries on whether the reverse charge applies.