New accounting procedures for construction industry businesses


New procedures are being introduced on 1 March 2021 (postponed from 1 October 2019), which affect any VAT registered businesses in the construction industry (that is those where CIS applies) when either of the following takes place:

  • A Construction Industry business (the main contractor) buys in construction services from VAT registered CIS suppliers and makes an onward supply of those services to their customer; or
  • A VAT registered Construction Industry business (the sub contractor) sells construction services to other CIS contractors where that contractor will go on to make an onward supply of the services to their customer.

What is changing?

Under current rules, a CIS business charges VAT to their customer, will collect the VAT from their customer when the invoice is paid and will account for it to HMRC in Box 1 (outputs) of their VAT return.

This is changing for supplies between VAT registered business, which are both in the Construction Industry. The contractor raising the invoice will charge their CIS customer without adding in the VAT element.  The customer however will still need to make a record of what the VAT element should be in respect of that invoice and when completing their VAT Return enter in Box 4 (inputs) and Box 1 (outputs) the value of VAT related to that invoice.

In effect, the transaction removes the flow of cash for the VAT element between the two construction businesses. The contractor receiving goods and services will declare the same amount of VAT in Box 1 and Box 4, which means there is no VAT to reclaim on those costs. The contractor providing goods and services will not complete the VAT element in Box 1 of their return.  This is known in the VAT world as a “reverse charge” procedure.

Which sales are caught by the new rules?

The new reverse charge procedures will apply to the following transactions:

  • The legislation refers to “specified services” but these do not apply to services supplied to non-construction businesses, such as a retailer having their premises improved or any other end-user customer or building owner;
  • The reverse charge will also apply to any goods supplied by the builder as part of their work;
  • Employment businesses are excluded from the new rules;
  • The reverse charge is based on the rate of VAT that applies for the work in question but only supplies subject to either 5% or 20% VAT. Zero-rated sales are excluded.


Sub-Contractor - Mike is an electrician, VAT registered as a sole trader. He is doing some work on an office block, invoicing the main contractor Steve for his work.

Contractor - Steve is a building contractor and also VAT registered, who will then invoice the building owner. Steve is not an “end-user” because he is making an onward supply of construction services to his own customer. He is an “intermediary supplier”.

The invoice raised by Mike will be subject to the new procedures ie no VAT is charged. Let’s say the value of his work including materials will be for £5,000:

Mike’s VAT return will only include the value of the sale in Box 6 (outputs) of his VAT return:

  • Box 6 – outputs - £5,000

Mike’s VAT return does not include the VAT element in Box 1.

Steve will do the reverse charge calculation and make the following entries on his return:

  • Box 1 – output VAT £1,000 (ie £5,000 x 20%)
  • Box 4 – input VAT - £1,000 (same figure as Box 1)
  • Box 7 – inputs - £5,000 (net value of payment made to Steve)

Other issues to consider

Taking the Steve and Mike example a stage further, they each have their own responsibilities with the new rules.

Mike must ensure that Steve is both registered for the CIS (Construction Industry Scheme) and also has a valid VAT number.

Mike must also specify on his sales invoices the amount and rate of VAT that Steve must declare with the reverse charge ie 5% or 20% VAT.  But note, this is not added to the total due from Steve.

Mike should include wording on the sales invoice along the lines of: “Reverse charge: customer to pay the VAT to HMRC.”

Steve must tell Mike if he is an “end-user” or “intermediary supplier”. If he is an intermediary supplier, then Mike will not charge him VAT because the reverse charge applies.

It is important that Steve does not pay VAT incorrectly to Mike because HMRC could raise an assessment for the VAT that he should have declared, ie as if the reverse charge had been done correctly.

Here are a few other points to consider:

  • Checks should be applied to ensure building contractor clients invoiced under the new rules are properly registered for VAT and are bona fide. Section 9 of HMRC VAT Notice 735: Domestic reverse charge procedure gives further information.
  • HMRC suggests that if there are any doubts about the credentials of a builder customer, then a deposit equal to the amount of VAT not being charged should be collected from the customer eg if they have applied for but not received a VAT number.
  • VAT Notice 735 mentioned above gives examples of customer checks that should be considered at para 9.3.1.

Support from your adviser

Banks Sheridan recognise the significant changes in how VAT reporting is dealt with in the construction industry.  Whilst HMRC have stated that initially there will be a “light touch” applied to errors in the first 6 months, however, in future penalties will be imposed, even for innocent errors, or with immediate effect in cases where they believe careless disregard had been applied.

We are available to ensure that your bookkeeping systems are correctly set up to deal with these matters. Please call us on 01270 530970 or email for more information or to book an appointment.