A reminder of how the VAT Reverse Charge in Construction works

Introduced back in March 2021, the domestic reverse charge for construction services was aimed at tackling VAT fraud. Under these rules, VAT-registered customers, rather than suppliers, must account for VAT when receiving certain construction services.

When the Reverse Charge Applies

It applies when all the following are true:

• Both parties (supplier and customer) are VAT registered and CIS registered.

• The supply is within the scope of CIS and would be either standard-rated (20%) or reduced-rated (5%).

• The customer has not declared themselves as an 'end user' or 'intermediary supplier' – see below.

When It Does Not Apply

The reverse charge does not apply if:

• The customer is not VAT registered.

• The customer has provided notification that they are an end user.   An end user is a business which is not making onward supplies of construction services.

• The customer has provided notification that they are an intermediary.  An intermediary is a connected business (e.g. a group company) buying services for internal use.

• The service is supplied by an employment business (VAT is charged normally).

• The transaction is outside the scope of CIS.

How the Reverse Charge Works:

This is best demonstrated by way of an example:

Subcontractor Eric invoices £10,000 for standard rated construction services to Bob Builders, the contractor.

No VAT is charged on Eric’s invoice so he just receives the amount net of VAT from his customer.

Bob Builders accounts for both output and input tax by paying over £2,000 VAT as Output VAT and reclaiming the same £2,000 as Input VAT, assuming it is recoverable under normal VAT rules.

Eric includes the net figure of £10,000 in Box 6 on the VAT Return (sales total net of VAT); Bob Builders includes this in Box 7 (purchases total net of VAT).

Common Pitfalls

1. Box Errors on VAT Return

Buyers wrongly including values in Box 6 (sales total net of VAT) —only the supplier does this.

2. End User Confusion

End user notifications are optional, but must be made for the supplier to stop applying the reverse charge.

If buyers fail to notify then the reverse charge still applies.

3. Incorrect End User Assumption

Contractors mistakenly think they are end users because they work for non-VAT-registered clients.  This is a misconception. What matters is whether they are making an onward supply.

4. Labour/Material Invoice Splits

Issuing separate invoices for labour and materials does not avoid the reverse charge.

If labour and materials are part of one contract, the entire supply is reverse charged.

5. Sales invoices not clearly stating that the reverse charge applies.  Examples of appropriate wording:

Reverse charge: customer to account for VAT to HMRCorVAT Act 1994 Section 55A applies. Reverse charge applies.

Conclusion

If you operate a construction business, it may be time to review your reverse charge procedures.  We are here to help.  Please do not hesitate to get in touch with any questions you might have.