VAT domestic reverse charge: explained for trades and construction
Since 1 March 2021, most VAT registered construction businesses have not charged VAT to their construction customers. The customer accounts for it instead. It caught a lot of people out when it landed, and it still does, because the rules turn on facts about your customer rather than facts about the job.
Get it wrong in one direction and you have charged VAT you should not have. Get it wrong in the other and you have under declared. Neither is a comfortable letter to receive from HMRC.
When you must use the reverse charge
You must use it when all of the following are true:
- You are VAT registered in the UK
- Your customer is VAT registered in the UK
- The payment is reported under the Construction Industry Scheme
- The work is standard rated or reduced rated for VAT
- You are not an employment business supplying staff or workers
- Your customer has not told you in writing that they are an end user or an intermediary supplier
If any one of those is not true, you charge VAT the normal way.
The end user rule, which is where most mistakes happen
An end user is a customer who has to report payments under CIS but does not go on to supply construction services themselves. A property owner or developer having work done on their own building is the usual example.
The important part: the exemption only applies if your customer tells you in writing. You are not expected to guess. If nobody has sent you a written end user declaration, the reverse charge applies. Get the declaration on file before you invoice, not after.
Domestic customers, ordinary householders, are outside all of this. You charge them VAT as normal.
What goes on the invoice
Your invoice must show that the reverse charge applies and must state the amount of VAT due, or the rate, even though you are not charging it. You do not include that VAT in the amount you are asking to be paid.
The wording needs to be unambiguous. Something along the lines of: reverse charge, customer to account for VAT to HMRC.
What it does to your cash flow
This is the part nobody warned people about. If you are a subcontractor, you used to collect VAT from your contractor and hold it until your return was due. That money was working in your business in the meantime. Under the reverse charge you never receive it at all.
For a business turning over a few hundred thousand a year, that is a real and permanent reduction in working capital. Some subcontractors end up in a repayment position every quarter, in which case monthly VAT returns are worth considering so the money comes back faster. It is also worth reviewing whether the flat rate scheme still makes sense, because for many construction businesses it stopped making sense the day the reverse charge came in.
What we do
We work only with trades and construction, so this is not an occasional query for us. We set your invoicing up correctly, get end user declarations on file, make sure your bookkeeping software applies the right treatment, and check whether you should be filing monthly rather than quarterly.
If you have been getting it wrong, we would rather find it and correct it than leave it sitting there. Disclosures made voluntarily are treated very differently from ones HMRC find themselves.
Common questions
Do I still charge VAT to a householder? Yes. The reverse charge only applies where your customer is VAT registered and the payment falls under CIS.
What if my customer will not give me an end user declaration? Then the reverse charge applies and you do not charge VAT. You cannot apply the exemption on the strength of a conversation.
Does it apply to materials? Where a supply of construction services includes materials, the reverse charge applies to the whole supply, unlike CIS which looks at labour only.
I am not VAT registered. Does it affect me? Not directly, but it removes one of the cash flow reasons some subcontractors registered voluntarily. Worth reviewing.
Not sure whether you are applying it correctly? Send us a recent invoice and we will tell you.