As announced in the Autumn Budget of 2017, following consultation earlier in 2017, a domestic ‘reverse charge’ in respect of VAT on certain supplies will be introduced to tackle fraud in construction labour supply chains.

This will be subject to a further round of consultation starting in spring 2018.

The changes seek to combat the situation where each entity in the chain obtains gross payment status (GPS) under the construction industry scheme (CIS) and is VAT registered, but the bottom entity then goes ‘missing’, resulting in a loss of VAT and income tax.

The consultation proposes some possible options to target this, including:

  • A VAT domestic reverse charge similar to those already in place in the telecoms and energy sectors.
  • Changes to the qualifying criteria for gross payment status under CIS.

VAT reverse charge

Based on the draft legislation, this will come into effect on 1 October 2019 to introduce a reverse charge.

  • The effect of the reverse charge is to ensure that the supplier of goods or services is not involved in the payment of VAT to HMRC. This shifts the liability for VAT payments to the customer.
  • The customer declares the VAT due as output tax on its own VAT return. Typically, the same amount is recovered as input tax on the same VAT return (subject to the normal partial exemption rules). This means that for most transactions the VAT is simply netted off and is no more than an accounting entry.

Based on feedback from the initial consultation, it has been decided that:

  • There will be a long lead-in time for the change so that businesses can prepare for the changes and make adjustments for cash flow.
  • In terms of design and scope of the reverse charge, the Government believes it should follow the CIS definition for construction services and have as few exceptions as possible (although these will include zero-rated supplies such as new house-building).
  • There will be no threshold set based on supply value or turnover as this will be difficult to administer and would represent an on-going fraud risk.

The Government has decided that as fraud is not found at the final customer stage, it will exclude supplies to the final customer.

The construction industry scheme

Based on the consultation results, the Government has decided not to make changes to the structure of CIS. Instead it is increasing compliance resources in order to stop fraudsters obtaining GPS and removing GPS where the applicant is no longer a fit and proper person under section 74 Finance Act 2004.


We broadly welcome this legislation. We feel that HMRC has been targeting innocent businesses which may actually be many steps in a chain away from the potential fraudulent person.

The devil, of course, will be in the detail. Affected businesses should be fully informed about when VAT should be charged and when a reverse charge is required, as after the implementation date, VAT incorrectly charged will not be recoverable as input tax.

Next steps

The responses to the 2017 consultation were published on 1 December 2017 and provide the basis for the planned changes. There will be a technical consultation on draft legislation in spring 2018, and a final draft of the legislation and guidance will be published in October 2018. The legislation will come into effect on 1 October 2019.

Our team will monitor the changes and the outcome of the further consultation and will inform our clients at the appropriate time.

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