The VAT domestic reverse charge for construction, explained with invoice examples

The domestic reverse charge for building and construction services has applied since 1 March 2021, and it still causes more invoice disputes than any other VAT rule in the trade. The idea is simple: in a chain of VAT-registered businesses doing CIS work, the customer accounts for the VAT instead of the supplier. The practice needs three questions answered on every invoice.

Does it apply to this supply?

The reverse charge applies when all of the following are true:

• The supply is of construction services within the scope of CIS (or goods supplied with those services)
• The supply is standard-rated or reduced-rated; zero-rated work such as most new-build housing is excluded
• Both supplier and customer are VAT-registered
• Both are registered for CIS, or the payment is reported under CIS
• The customer is not an end user or an intermediary supplier who has told you so in writing

Typical reverse-charge cases: a subcontractor invoicing a main contractor; a main contractor invoicing a developer who will sell on the buildings. Typical normal-VAT cases: anyone invoicing a homeowner; a contractor invoicing a business for work on its own premises when that business has confirmed it is an end user; invoicing a customer who is not VAT-registered.

The end-user rule

An end user is a business that receives construction services for its own use rather than to supply them on: a retailer having a shop fitted, a company refurbishing its own office, a landlord in some cases. The end user must tell the supplier in writing that it is an end user; if it does not, the supplier should apply the reverse charge. Many contractors put a standard line on their order acknowledgement asking the customer to confirm its status, which settles it before the first invoice.

What the invoice must say

A reverse-charge invoice shows all the usual information, states the VAT rate that applies and the amount of VAT the customer must account for, and must not charge that VAT. It needs a clear statement such as "Reverse charge: VAT Act 1994 Section 55A applies" or "Reverse charge: customer to pay the VAT to HMRC". The total payable is the net amount.

Example: a subcontractor does £10,000 of labour and £2,000 of materials for a VAT-registered main contractor. The invoice shows £12,000 net, a note that 20% VAT of £2,400 is to be accounted for by the customer under the reverse charge, and a total due of £12,000. The CIS deduction then applies to the labour element in the normal way.

The cash-flow effect

Subcontractors used to collect VAT and hold it for a quarter; under the reverse charge they do not, which hurts cash flow for firms that relied on it. Many subcontractors are now repayment traders, reclaiming more input VAT than they charge, and should consider monthly VAT returns to speed up the refunds. Main contractors gain the cash instead.

Schemes it affects

You cannot use the cash accounting scheme for reverse-charge supplies. If you are on the flat rate scheme, reverse-charge sales are excluded from your flat rate turnover, which for many subcontractors means the flat rate scheme is no longer worth it.

Common mistakes

• Charging VAT to a main contractor who should have been reverse-charged, leading to a rejected invoice and a delayed payment
• Applying the reverse charge to a homeowner, who then cannot account for it
• Missing the end-user confirmation and arguing about it at month end
• Forgetting the reverse charge on retention releases and final accounts, which follow the same rules as the original supply
• Not showing the VAT amount the customer must account for

Getting it right every time

The rule is the same on every invoice once you know the customer's status, so record it once. EstiMate's invoicing holds each customer's VAT and CIS status, applies the reverse-charge wording automatically, and the VAT return picks up the figures in the right boxes. The year-end accounts then show the position without a reconciliation exercise.