The VAT domestic reverse charge for construction, explained

If you work under CIS and you have ever stared at an invoice wondering whether to add the VAT or leave it off, this is the rule you are wrestling with. The VAT domestic reverse charge changed how VAT works on most construction invoices between businesses, and it catches people out because it looks like you are doing something wrong when you are actually doing it right.

This guide explains what the reverse charge is, the conditions that decide whether it applies, the end user rule that trips people up, and the wording HMRC expects on the invoice. If you would rather just answer a few questions about a specific job, use the free reverse charge VAT checker, which gives you the result and the invoice wording in a couple of minutes.

What the domestic reverse charge is

Normally, when you do VATable work, you add VAT to your invoice, your customer pays you the lot, and you hand the VAT to HMRC. Under the reverse charge, that last part flips. You do not charge VAT at all. You invoice for the work only, and your customer accounts for the VAT to HMRC themselves, recording it as both owed and reclaimed on their own return.

It came in on 1 March 2021 as an anti-fraud measure. There was a scam where a subcontractor would charge VAT, collect it, and disappear without ever paying HMRC. By moving responsibility for the VAT from the subcontractor to the customer, HMRC removed the pot of money that could go missing. The full rules are on GOV.UK.

The important thing to hold on to is that the VAT still exists. It just never travels through your bank account.

When the reverse charge applies

The reverse charge applies to a supply only when all of the following are true:

• The work is a construction service within the Construction Industry Scheme. Most on-site building, civil engineering, installation, repair and finishing work is in scope. Professional services such as architecture and surveying, and materials supplied on their own without any work, are not. Nor, when supplied on their own, are installing security systems such as burglar alarms and CCTV, installing seating, blinds and shutters, and signwriting. GOV.UK has the full list of what is in and out.
• The work is standard-rated (20%) or reduced-rated (5%) for VAT. Zero-rated work, such as building a new home, is excluded, and carries no VAT anyway.
• Both you and your customer are VAT registered.
• The payment for the work is reported under CIS, which normally means your customer is a CIS-registered contractor.
• Your customer has not told you in writing that they are an end user or intermediary supplier, which is the part worth its own section below.

If every one of those is true, you use the reverse charge and do not charge VAT. If any one of them is not, you charge VAT as normal, unless you are not VAT registered, in which case you do not charge VAT at all and the reverse charge simply does not apply.

The end user rule, and why it trips people up

For the reverse charge, an end user is a business that is VAT and CIS registered and does not sell the construction work on. A VAT and CIS registered business having its own premises extended, and not selling the work on, is an end user. An end user gets normal VAT once it tells you in writing that it is an end user. A private householder is not an end user, but you still charge them VAT as normal, because they are not VAT registered.

That is why the position depends on where you sit in the chain, not just on what work you did:

• Subcontractor to main contractor, where the contractor is supplying the work on, is a reverse charge.
• Main contractor to the property owner is normal VAT if the owner is a private householder, or is an end user who has told the contractor so in writing.

There is a wrinkle. A business connected to the end user, such as its landlord or tenant, or a company in the same group, that passes the work on to the end user without changing it, is an intermediary supplier. If it tells you so in writing, it is treated the same as an end user and you charge VAT as normal.

Because you cannot always tell from the outside whether your customer is an end user, it is up to them to tell you, in writing, if they are. That written notification is optional, not something they have to send, but it is what lets you treat the supply as normal VAT. If they have not told you they are an end user or intermediary, and everything else points to the reverse charge, you apply it, even if you think they are an end user. The detail on end users and intermediaries is in the HMRC technical guide.

What to put on your invoice

When the reverse charge applies, your invoice shows everything a normal invoice shows, with two differences. You do not add VAT to the total, and you make clear that the reverse charge applies and that the customer has to account for the VAT. You also show the amount of VAT they need to account for, but you do not include it in the total charged. If your invoicing system cannot show the amount, HMRC lets you state the rate instead.

The law requires the words "reverse charge" on the invoice. The rest of the wording is not fixed, and HMRC gives these examples that meet the requirement, from the construction invoice guidance:

• Reverse charge: VAT Act 1994 Section 55A applies
• Reverse charge: S55A VATA 94 applies
• Reverse charge: Customer to pay the VAT to HMRC

A clear version that says both that the reverse charge applies and who pays the VAT looks like this: "Reverse charge: VAT Act 1994 Section 55A applies. Customer to pay the VAT to HMRC." Show the VAT figure alongside it, for example £200.00 VAT at 20% on £1,000 of work, without adding it to what the customer pays.

If you invoice through Trame you do not have to remember any of this. Switch an invoice to the reverse charge and it removes the VAT, shows the amount for your customer to account for, and adds the wording for you. That is covered on the invoicing page, and step by step in the help centre under applying the reverse charge on an invoice.

What it means for your cash flow

There is a real, practical sting to this rule that is worth naming. Before the reverse charge, subcontractors effectively held their customers' VAT for a time before paying it over to HMRC. It was a quiet cash flow buffer, and the reverse charge removed it. On a reverse charge invoice you receive only the value of your work, not the VAT on top, so if your business was leaning on that buffer, the change tightened things.

There is a flip side. If you are a subcontractor who is regularly in a VAT repayment position, because you buy standard-rated materials but your onward supplies now carry no output VAT, you can apply to move to monthly VAT returns to get those repayments back faster rather than waiting for the quarter.

When it does not apply

It is just as useful to know when to carry on as normal. Charge VAT the usual way when your customer has told you in writing that they are an end user or intermediary supplier, when your customer is not VAT registered, when the work is zero-rated, or when the payment is not reported under CIS. There is also a carve-out for employment businesses that only supply staff or workers, which stay on normal VAT rather than the reverse charge. And if you are not VAT registered yourself, you do not charge VAT and the reverse charge is not in the picture at all.

There is also a rule for small amounts, called the 5% disregard. If the reverse charge part of a job is 5% or less of the whole contract value, you and your customer can agree at the start of the contract to ignore it and use normal VAT. It is worked out on the contract value, not invoice by invoice, and it does not apply where most of the job is zero-rated. The detail is in the HMRC technical guide.

If you are unsure which side of the line a particular job falls, the reverse charge VAT checker walks through the same questions and tells you, with the wording to use if it applies.

Related guides

The reverse charge sits alongside two things almost every CIS subcontractor is already dealing with:

• How to claim a CIS tax refund, if your contractor has been deducting 20 per cent from your payments under CIS and you are owed some back.
• Self-employed tax explained, for how your profit, allowable expenses, and tax bill actually fit together.

A note on using this guide

This guide explains the general rules to help you understand how the reverse charge works, not as tax advice for your specific situation. VAT can turn on the particular facts of a job and a supply chain, so if you are unsure, or the amounts are significant, check the position with HMRC or your accountant before you invoice.

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