Reverse Charge VAT: Who Pays It and When

‍‌‌​​​‌​​​‌​‌​​​​​​‌​‌​‌​‌​‌‌‍From 1 March 2021, most standard- and reduced-rate construction services between VAT-registered businesses in CIS are caught by the domestic reverse charge. Instead of you charging VAT and handing it to HMRC, your customer does the VAT bit on their own return.

This is general guidance only and is not tax or legal advice. Always check VAT with your accountant and HMRC's guidance (VAT Notice 735 and the reverse charge construction guidance) before you rely on this.

1. THE BASIC IDEA IN PLAIN ENGLISH

Under the domestic reverse charge:

• If it applies, you do not charge VAT on your invoice.
• Your customer:
  • Works out the VAT as if you had charged it.
  • Puts that VAT on their VAT return as output tax.
  • Usually claims it back as input tax on the same return, if they can normally recover VAT.

So for most VAT-registered contractors:

• It's cash-flow-neutral, but it stops one bad actor charging VAT and disappearing.
• For you as subbie, your sales are lower (no VAT on top), but you don't have to hand over output VAT on those reverse-charged jobs.

The law sits in section 55A VAT Act 1994 and detailed rules are in VAT Notice 735 and HMRC's specific reverse charge guidance for building and construction.

2. QUICK TEST – WHEN THE REVERSE CHARGE APPLIES

HMRC sets out a simple checklist. The reverse charge normally applies when all of these are true:

1. Both you and your customer are VAT-registered in the UK.
2. The supply is within the CIS regime – payments would be reported under CIS.
3. The work is standard-rated (20%) or reduced-rated (5%) construction services covered by the rules, not zero-rated.
4. Your customer has not told you in writing they are an end user or an intermediary supplier (more on that below).

If all four are met, you must use the reverse charge. If any one fails, you usually use normal VAT rules.

Domestic jobs: If you're working direct for a private householder, they're not VAT-registered, so the reverse charge does not apply – you just charge VAT in the normal way if you're over the threshold and VAT-registered.

3. WHICH CONSTRUCTION SERVICES ARE CAUGHT

The reverse charge covers most "construction operations" that are already under CIS, for standard and reduced rate supplies, including:

• Building work: constructing, altering, repairing, extending, demolishing buildings and structures.
• Groundworks: site clearance, excavation, earth-moving, foundations, roadworks, etc.
• Systems: installing heating, lighting, power, air-con, drainage, sanitation, fire protection systems.
• Finishing during construction: internal cleaning during construction, painting, decorating.
• Supporting work: scaffolding, access roads, landscaping as part of the build.

If a job is a mix of reverse-charge and non-reverse-charge services, HMRC says that if any part would be reverse-charged, usually the whole supply is treated as reverse-charge.

Things generally outside the reverse charge (normal VAT rules apply) include:

• Work for end users who have properly declared that status.
• Pure design or professional services (architects, surveyors, etc.).
• The supply of staff only (employment businesses) rather than construction services.

4. END USERS AND INTERMEDIARY SUPPLIERS

This is where people get tangled.

End user (for reverse charge purposes): A VAT-registered business who buys the construction service for itself, and is the final consumer of it – they don't sell on construction services from that work.

Example: a supermarket chain having their own store refitted; a developer using a contractor to build out their own HQ (not reselling construction services).

Reverse charge does not apply to supplies to end users if they tell you in writing they are an end user.

Intermediary suppliers: VAT-registered and CIS-registered businesses connected to the end user (e.g. group companies, joint ventures with a land interest) that also can opt out via an intermediary declaration.

Key practical points:

• The customer must give you an end user or intermediary declaration in writing – email, letter or contract clause is fine.
• If they don't give that, HMRC say you should default to reverse charge, even if you suspect they're really an end user.
• Domestic jobs don't need end user declarations – the customer isn't VAT-registered so the reverse charge doesn't apply anyway.

5. WHAT YOUR INVOICE SHOULD LOOK LIKE

If the reverse charge does apply, you:

• Issue your invoice without VAT.
• Clearly state that the reverse charge applies and that the customer must account for the VAT.

HMRC suggests wording like:

"Reverse charge: customer to account for VAT to HMRC."

Include:

• Your VAT number.
• The amount of VAT that applies to the supply (as information only) or the VAT rate, even though you're not charging it.

If the reverse charge does not apply (e.g. you're working for an end user who has declared it or for a domestic customer), you invoice under normal VAT rules and charge VAT at 20% or 5% where appropriate.

6. COMMON MISTAKES AND HOW TO AVOID THEM

Mistakes that cost trades money or trigger HMRC headaches:

Charging VAT when the reverse charge should apply You add 20% and the contractor pays it, then HMRC later say reverse charge applied – you may have to repay the VAT to the contractor and fix past returns.

Not applying reverse charge when CIS applies between two VAT-registered firms HMRC's guidance is clear: if in doubt and CIS applies, and there's no end user declaration, you should usually use the reverse charge.

Treating a customer as an end user without written confirmation HMRC expects end user status to be in writing. Verbal or assumed "yeah, we're the end user" is not enough and can lead to HMRC assessing the customer for undeclared VAT.

Getting domestic vs B2B muddled If you're working for a private householder, there's no reverse charge – you just use normal VAT rules if you're VAT-registered.

Good habits:

Ask new B2B customers:

• Are you VAT-registered?
• Are you CIS-registered?
• Are you acting as an end user, and if so, can you confirm that in writing?

Keep copies of any end user or intermediary declarations with your VAT records.

Make sure your accounting software is set up for reverse charge construction services – most mainstream systems now support it.

This page is guidance only and does not constitute tax or legal advice. Using it does not make us your adviser. Always get advice from a qualified accountant or VAT specialist on your specific jobs and customers.

What to do next

• Run through the four-point checklist in Section 2 for every new B2B customer to decide if the reverse charge applies.
• Ask new customers upfront: are you VAT-registered, CIS-registered, and acting as an end user? Get any end user declaration in writing.
• Check your accounting software is set up to handle reverse charge construction invoices · most mainstream packages now support it.
• Review your recent invoices to make sure you haven't charged VAT where the reverse charge should apply, or vice versa.
• If in doubt, talk to your accountant before invoicing · fixing VAT mistakes after the fact is expensive and time-consuming.

Sources

• Value Added Tax Act 1994 · section 55A · the legal basis for the domestic reverse charge
• HMRC VAT Notice 735 · HMRC's detailed guidance on the reverse charge for construction
• Finance Act 2004 · Part 3 (Construction Industry Scheme) · CIS registration that triggers the reverse charge

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