Construction reverse charge in Malta — subcontractors and main contractors
How CFR Notice 113/2019 shifts the VAT burden from supplier to customer in Maltese construction, what to put on the invoice, and the apartment-block carve-out.
Malta introduced a domestic reverse charge for construction services in 2019, following EU Council Implementing Decision 2018/1493 — the supplier issues the invoice without VAT, and the customer self-accounts for the 18% on their own VAT return. The mechanism targets cash-flow fraud in the construction supply chain, where subcontractors historically collected VAT from main contractors but failed to remit it to CFR. The rules apply to a defined list of construction works and to specific supplier-customer combinations — getting the scope wrong is costly: an incorrectly issued invoice with 18% VAT charged on a reverse-charge supply triggers a CFR adjustment and the recipient cannot recover the wrongly charged VAT.
- Scope: subcontractor → main contractor for new construction, demolition, structural alteration, roofing, civil engineering.
- Exempt from the reverse charge: supply of materials only, residential apartment blocks under 5 units, installations to private consumers.
- Supplier invoice: no VAT, mark 'Reverse charge — Article 20A VAT Act' clearly.
- Customer self-accounts on the same VAT return, both as output VAT (18%) and input VAT (18%) — net cash effect is zero for fully taxable customers.
How it works
You identify whether your construction supply is in scope. The reverse charge applies to subcontractor supplies of construction services to a main contractor that is itself a VAT-registered Maltese business engaged in the construction sector. Pure supply of construction materials (e.g. delivery of concrete) without installation is excluded — that's still standard 18% supplier-charged VAT.
If in scope, you (the subcontractor) issue an invoice without VAT. The invoice must include the wording 'Reverse charge — Article 20A VAT Act' or equivalent (e.g. 'Inverżjoni tat-taxxa' in Maltese), the buyer's VAT number must be quoted, and the cbc:TaxCategory in any electronic invoice must use code AE (reverse charge).
The customer (main contractor) receives the invoice and self-accounts on their next VAT return: they declare 18% output VAT on the supply received, and immediately claim the same 18% as input VAT — net zero cash effect if the construction project is fully taxable (e.g. a B2B commercial building). For a partially exempt customer (e.g. a developer building a residential block that's outside the VAT system on sale), input VAT recovery is restricted.
Both sides must keep the structured documentation: subcontractor's invoice, customer's self-assessment journal entry, and the contract evidencing the construction supply chain. CFR audits the construction sector regularly — Notice 113/2019 sets out the documentation expectations.
If you're uncertain whether your specific work falls in scope (e.g. mixed supply of installation + materials, or services to a non-construction business), you can request a formal binding ruling from CFR. The ruling is binding on both sides and protects against retroactive reclassification during audit.
Legal references
- VAT Act, Chapter 406, art. 20A — domestic reverse charge for construction services.
- CFR Malta Notice 113/2019 — scope, examples and documentation expectations for the construction reverse charge.
- Council Implementing Decision (EU) 2018/1493 — authorisation for Malta to apply the reverse charge.
Frequently asked questions
Does the reverse charge apply to residential construction?
Partly. The mechanism applies to subcontractor → main contractor supplies in the construction sector, including residential. But the supply of new residential apartments by the developer to the final buyer is itself exempt under the Fifth Schedule (Item 19) of the VAT Act, so the developer cannot recover input VAT on inputs related to that exempt onward supply. The result is that the reverse charge is correctly applied at the subcontractor level but the developer's apportionment rules limit input VAT recovery for the exempt residential portion of the project.
What happens if I charge VAT on a reverse-charge supply by mistake?
The customer cannot recover the wrongly charged VAT as input tax, because the 18% wasn't legally due. You (the supplier) must issue a credit note to reverse the wrongly charged VAT, then issue a corrected invoice with the reverse-charge wording. If you've already remitted the VAT to CFR, you reclaim it on your next return; if not, you simply don't pay it over. The customer's books need to be adjusted on the same VAT period — both sides typically coordinate the correction quickly to avoid CFR adjustments.
Does the reverse charge apply to materials I sell separately from installation?
No — a pure supply of construction materials without installation is excluded from the reverse charge. You charge 18% standard VAT and the customer recovers it as input VAT in the usual way. But a single contract that bundles materials + installation as a single supply is typically a single composite supply of construction services, fully in scope of the reverse charge — separating the line items on the invoice does not split the supply for VAT purposes.
How is the construction reverse charge encoded in Peppol BIS 3.0?
Use cbc:TaxCategoryID with value AE (Reverse charge), cbc:Percent of 0.00, and cbc:TaxExemptionReason with the wording 'Reverse charge — Article 20A VAT Act'. The cac:TaxScheme/cbc:ID stays VAT. The customer's AP and accounting system will read AE and automatically apply the self-accounting journal entry, removing one error source from the customer's reconciliation.
Are there penalties for getting the scope wrong?
CFR can issue an additional assessment for the VAT due, plus interest (calculated daily from the original return date) and an administrative penalty up to 20% of the underpaid tax under art. 73 of the VAT Act. Bona fide errors with good documentation usually attract only the interest and a reduced penalty. Repeated or evidence-of-knowledge errors can attract the full 20% penalty, plus possible criminal penalties for tax fraud in egregious cases.