Since March 2021, a lot of construction invoices don't carry VAT any more. Instead the customer accounts for it. It confuses everyone the first time, so here's the whole thing in plain terms.
What changed
Normally you charge your customer VAT, they pay it to you, and you hand it to HMRC. Under the reverse charge, you don't charge the VAT at all. You invoice the net amount, say on the invoice that the reverse charge applies, and your customer works out the VAT themselves, putting it on their own return as both output tax and input tax.
They're usually no worse off. You just stop being the middleman for that money. HMRC brought it in to stop firms charging VAT, disappearing and never paying it over.
When it applies
All of these have to be true:
- Your customer is VAT registered in the UK.
- The work falls under the Construction Industry Scheme.
- The work is standard rated (20%) or reduced rated (5%). Zero-rated work, like a new build house, is out.
- Your customer is not an end user and hasn't told you in writing that they are.
Miss any one of those and you invoice normally, with VAT on as usual.
Who counts as an end user
An end user is somebody who receives the work but doesn't sell it on as part of their own construction business. A landlord having their block refurbished. A homeowner. A retailer fitting out their own shop. A developer keeping the building.
If your customer is an end user, the reverse charge doesn't apply and you charge VAT the normal way. Get their end user statement in writing and keep it. An email saying "we confirm we are an end user for the purposes of section 55A VAT Act 1994" is enough. Without it, HMRC's default position is that the reverse charge applied and you got it wrong.
A quick rule of thumb: main contractor invoicing the building's owner is usually normal VAT. Subcontractor invoicing a main contractor is usually reverse charge.
What has to be on the invoice
Everything a normal invoice needs, plus:
- A clear statement that the reverse charge applies, for example: "Domestic reverse charge: customer to account to HMRC for the VAT."
- The VAT rate or the amount of VAT due, shown but not added to the total.
So a £4,000 job shows £4,000 to pay, with a note saying reverse charge VAT at 20% would be £800. Your customer pays you £4,000, not £4,800.
On your VAT return
| If you're the supplier | If you're the customer | |
|---|---|---|
| VAT charged | None | You account for it |
| Box 1 | Nothing for this sale | The VAT as output tax |
| Box 4 | - | The same VAT reclaimed as input tax |
| Box 6 / 7 | Net sale in box 6 | Net purchase in box 7 |
Two things worth knowing
Cash flow. If you're a subbie used to holding VAT for a few weeks before handing it over, that cushion is gone. Plenty of firms felt it when this came in. If your bank balance relies on money that isn't yours, this is the moment to fix it.
The 5% rule. If the reverse charge part of an invoice is 5% or less of the total value, you can ignore it and treat the whole invoice as normal VAT. It saves splitting hairs on mixed jobs.
The short version
- VAT registered customer, CIS work, not an end user: reverse charge, no VAT on the invoice.
- Get end user statements in writing and keep them.
- Say it on the invoice and show the VAT without adding it.
- Expect the cash flow hit if you're the subbie.
Plain-English explainer, not tax advice. The rules have edge cases, especially on mixed supplies and with staff providers. Check with your accountant and read HMRC's guidance on gov.uk.