VAT — Reverse charge on construction works

Construction reverse charge:
mechanism and pitfalls (Tax Code 283, 2 nonies)

Article 283, 2 nonies of the French Tax Code has, since 2014, put in place a reverse charge mechanism for VAT on construction works (repair, cleaning, maintenance, alteration, demolition) carried out by a subcontractor (within the meaning of Law no. 75-1334 of 31 December 1975) for a taxable customer. VAT is then due from the customer, not from the subcontractor. This mechanism, simple in appearance, generates recurring errors in practice: complex subcontracting chains, characterisation of the service, mandatory invoice mention, interaction with deduction.

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— In brief
Applicable text
Tax Code art. 283, 2 nonies (introduced by the 2014 Finance Act)
Subcontracting
Law no. 75-1334 of 31 December 1975, art. 1
BOFIP
BOI-TVA-DECLA-10-10-20
Mandatory mention
"Reverse charge" on the subcontractor's invoice
Sanction for default
VAT not deductible on the customer's side + penalties under Tax Code 1788 A
— 01

A mechanism that is simple to grasp, complex to run along a chain

The principle of the construction reverse charge is straightforward: for building works carried out by a subcontractor on behalf of a taxable customer, the subcontractor does not charge VAT; it is the customer who accounts for and deducts it simultaneously on its CA3 return, on the lines dedicated to reverse-charge operations and the corresponding deductible-VAT lines (refer to the DGFiP guidance in force for form 3310-CA3 for the exact line numbering). The mechanism is cash-flow neutral, but it requires a precise characterisation of the operations and of the parties involved.

In practice, pitfall no. 1 is the subcontracting chain. A main contractor subcontracts a lot; the tier-1 subcontractor in turn subcontracts to a tier-2 subcontractor. The reverse charge applies to each link of the chain (BOI-TVA-DECLA-10-10-20), which multiplies the checks to be carried out. An error at a single tier flows back up to the main principal, who may lose its right to deduct.

Our approach: for complex projects (office buildings, hotels, healthcare facilities), a prior audit of the subcontracting chain is essential. Tax audits systematically target construction operations above 1 M€ involving multi-tier subcontracting.

— 03

Case handled by the firm

Finishing-works company — reassessment of 240 k€ reduced to nil

Finishing-works company, turnover of 8 M€, audit covering 3 financial years. The tax authorities identified a failure to apply the reverse charge on cascading subcontracting (Tax Code art. 283, 2 nonies) and notified a reassessment of 240 k€ + interest + a 40% surcharge. Our strategy: (1) demonstrate the economic neutrality of the reverse charge where the subcontractors are 100% deductible, (2) prove good faith based on the BOI-TVA-DECLA-10-10-20 doctrine in force at the time of the operations, (3) spontaneous regularisation initiated before the reassessment proposal. Outcome: full withdrawal of the reassessment after exchanges with the inspector and a hierarchical appeal.

— 02

How the construction reverse charge works, in 4 points

1. Scope — works and subcontracting

Applies to construction works (repair, cleaning, maintenance, alteration, demolition) relating to immovable property, carried out by a subcontractor within the meaning of Law 75-1334 (the operator acts on behalf of a main contractor who contracts with the project owner). Excluded cases: services supplied directly to the project owner, sale of materials alone (without installation), certain plant-hire operations.

2. Invoicing on the subcontractor's side

The subcontractor issues an invoice without VAT, bearing the mandatory mention "Reverse charge" (BOI-TVA-DECLA-30-20-20-30). A missing mention creates a risk for the customer: the tax authorities may refuse the right to deduct if the invoice is non-compliant. The traceability of the subcontracting (contract, certificates, approval) must be documented.

3. Reporting on the customer's side (CA3)

The customer reports the operation simultaneously as output VAT (line dedicated to reverse-charge operations, see the DGFiP guidance in force for form 3310-CA3) and as deductible VAT (according to the applicable coefficient). In practice, the operation is cash-flow neutral if the customer is fully taxable. If its deduction coefficient is below 1 (partially exempt activity), the non-deductible output VAT remains due; this is an item to watch for mixed landlords or mixed groups.

4. Penalties and typical reassessments

Three recurring errors: (a) missing mention on the invoice → penalty under Tax Code 1737; (b) reverse charge omitted by the customer on its CA3 → reassessment + interest under 1727 + 5% penalty under Tax Code 1788 A; (c) incorrect application to non-eligible operations (sale of materials, direct services to the project owner) → rejection of the mechanism and VAT reassessment. Documented good faith allows the surcharges to be negotiated.

— Frequently asked questions

Which operations fall within the construction reverse charge?

Construction works in the broad sense: new construction, repair, cleaning, maintenance, alteration, demolition (Tax Code art. 283, 2 nonies). They must relate to immovable property and be carried out by a subcontractor within the meaning of Law 75-1334. Excluded cases: services supplied directly by the principal to the project owner, plant hire alone, sales of materials without installation.

What happens if the customer fails to apply the reverse charge?

Three cumulative penalties: (a) a 5% penalty on the amount of the undeclared operations (Tax Code art. 1788 A); (b) a reassessment of output VAT (a difference if the deduction coefficient is not 1); (c) late-payment interest of 0.20% per month (Tax Code 1727). If the error is isolated and made in good faith, the surcharge may be limited to 10% (1728); in the event of a deliberate breach, 40% (1729).

Does the reverse charge apply to all tiers of subcontracting?

Yes. BOI-TVA-DECLA-10-10-20 confirms that the reverse charge applies to each link of the chain, as soon as there is subcontracting within the meaning of Law 75-1334. The tier-1 subcontractor invoices without VAT to the main contractor; the tier-2 subcontractor invoices without VAT to the tier-1 subcontractor; and so on. The final customer (the main contractor) accounts for and deducts the VAT on its own acquisitions.

How can it be checked that an operator falls within the scope?

A 3-step audit: (1) check the subcontracting contract (Law 75-1334, approval where necessary), (2) check the nature of the works (relating to immovable property, within the meaning of the BOFIP), (3) check the status of the customer (VAT taxable person). Any operator falling outside one of these criteria reverts to the ordinary regime (VAT charged by the subcontractor).

Cité par

A construction project with subcontracting to audit?

A confidential first exchange: audit of the subcontracting chain, verification of the invoice mentions, organised regularisation where necessary.

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François Ouairy, avocat associé

Written by

Me François Ouairy, avocat associé en charge du bureau de Paris, expert en fiscalité immobilière, fiducie et fiscalité financière.

© BENSAID Avocats — The information on this site does not constitute legal advice and cannot replace a personalised tax analysis.