UK: Construction Industry Funders: Are Your Customers Prepared For The VAT Reverse Charge On Construction Services?

Last Updated: 12 September 2019
Article by Bethan Moore and Robert Russell

From 1 October 2019 HMRC will introduce a VAT domestic reverse charge (Reverse Charge) on specified construction services. This will have a significant impact on accounting processes, and could affect the cashflow of businesses operating in the construction sector. Funders into the sector should be alive to the changes and engage with borrowers1 now to ensure that they, and their supply chain, are ready for the change.

How does it work?

Under the Reverse Charge regime the customer (i.e. the recipient of the supply) will be responsible for identifying whether a supply is subject to the Reverse Charge and if it is, for accounting to HMRC for the VAT that is due, rather than paying it to the supplier as would normally be the case. The Reverse Charge will generally only apply on services that are supplied to customers that also operate in the construction sector - so it will not apply where the customer is a consumer or an 'end user' of construction services, or the customer is not registered for VAT.

Why is it being introduced?

The Reverse Charge is being introduced to counter perceived fraud in the construction industry, where it is believed that suppliers are receiving VAT from customers and 'disappearing' before they account for the VAT to HMRC.

Which supplies does it apply to?

The Reverse Charge will affect supplies of building and construction services that are supplied at the standard or reduced VAT rates and are defined as construction operations under the Construction Industry Scheme (CIS), including those relating to:

  • the construction, alteration, repair, extension, demolition or dismantling of buildings or structures;
  • the installation of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure;
  • painting or decorating the inside or the external surfaces of any building or structure; and
  • site clearance, earth-moving, excavation, tunnelling and laying of foundations.

Impact on Business

On a practical level the introduction of the Reverse Charge will have an administrative impact and businesses will need to ensure their payment processes are updated and accounts teams are trained to implement the changes required by the new legislation.

Perhaps of more concern for those funding into the sector will be the impact of the Reverse Charge on the cashflow of borrowers and businesses in borrowers' supply chains.

Many smaller contractors and sub-contractors operating in the sector currently rely on the VAT collected from customers as working capital before they pay it across to HMRC. Without putting plans in place to account for this loss in working capital, these businesses could be at risk of distress or failure with the consequent effect on the supply chain and delivery of projects.

How can funders prepare?

Ahead of the implementation of the Reverse Charge, funders into the sector should engage with borrowers to understand how the new regime will impact their business and the businesses of the borrower's suppliers, including their contractors and sub-contractors. This will allow the funder to identify and take steps to mitigate any risks.

Practical steps funders can take now include:

  • ensuring borrowers have modified their accounts processes to accommodate the new regime and ensure that there is minimal delay in the raising and collection of invoices as a result of the changes;
  • understanding the extent to which borrowers currently rely on the VAT collected from their customers as working capital and how the new regime will impact the ongoing trading of a borrower's business. To the extent that this analysis identifies risk, consider alternative support and funding arrangements to mitigate this exposure;
  • understanding the extent to which borrowers have assessed whether any businesses in their supply chain may be adversely effected by the loss of working capital. If there are suppliers at risk, have borrowers considered the viability of amending payment terms and processes with that supplier to mitigate the risk of the new regime precipitating their failure with the consequent effect on the borrower's own business?

The introduction of the Reverse Charge is one of a series of measures taken by HMRC to protect tax revenue. The partial reinstatement of crown preference from April 2020, which will elevate HMRC in the insolvency payment hierarchy for certain tax arrears, is also set to affect how funders analyse the risks of funding. These are two examples of where funders need to be alive to changes in tax law and how it could impact borrowers.


1 In this article we refer to a funder's customers as 'borrowers', but this would include customers in all types of funding arrangements, including, for example, invoice discounting.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions