VAT domestic reverse charge for construction

The VAT domestic reverse charge for building and construction services came in on 1 March 2021. It changed who hands the VAT to HMRC on a lot of construction invoices, and it caught out a great many small contractors who carried on charging VAT as they always had.

The rule itself is simple once you strip the jargon out. On qualifying work, you do not charge the customer VAT. The customer accounts for it themselves on their own VAT return.

Why it exists

It was introduced to stop missing trader fraud, where a supplier charges VAT, collects it, and disappears without ever paying it to HMRC. If the customer accounts for the VAT instead, there is no VAT sitting in the supplier's bank account to vanish with.

When it applies

All of the following have to be true. If any one of them is not, you charge VAT normally.

• The supply is of building and construction services within the scope of CIS
• The supply is standard rated (20%) or reduced rated (5%) — zero-rated work is out
• Both you and your customer are VAT registered in the UK
• Both you and your customer are registered for CIS
• The customer is not an end user or an intermediary supplier

The end user exemption

This is the part people get wrong most often. An end user is a customer who receives the construction services for themselves, rather than to sell on as part of a further construction supply.

A private homeowner is an end user, so domestic work is always charged with VAT as normal. A property developer who is having the work done on a building they own and will sell is generally an end user too. A main contractor who is passing your work on as part of their own supply to their client is not an end user, so the reverse charge applies to your invoice to them.

What has to be on the invoice

A reverse charge invoice still has to contain everything a normal VAT invoice contains, plus two extra things:

1. A clear statement that the domestic reverse charge applies and that the customer is required to account for the VAT. Wording such as "Reverse charge: VAT Act 1994 Section 55A applies. Customer to pay the VAT to HMRC" is accepted.
2. The VAT rate that would have applied, or the amount of VAT, shown for reference — but not added to the total the customer pays you.

So the customer pays you the net amount only. You show what the VAT would have been so they know what to account for.

A worked example

You invoice a main contractor £5,000 for qualifying construction services. Both of you are VAT and CIS registered, and they are not an end user.

1. Net amount: £5,000
2. VAT at 20%: £1,000 — shown on the invoice for information only
3. Total payable to you: £5,000
4. The contractor declares £1,000 of output VAT and, if they can recover it, £1,000 of input VAT on their return

What it does to your cash flow

This is worth planning for. Before the reverse charge, VAT-registered subcontractors held their customers' VAT for up to three months before paying it over, which was effectively an interest-free working capital loan. That has gone. If your business was quietly relying on it, the change is felt as a permanent reduction in the cash sitting in your account.

One consequence is that many subcontractors end up in a repayment position with HMRC, because they are still recovering VAT on materials but no longer charging output VAT on their sales. If that is you, moving to monthly VAT returns gets the money back faster than quarterly.