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The domestic reverse charge: who accounts for the VAT on construction work

The domestic reverse charge moved the VAT on much construction work from the supplier to the customer. If it applies, you do not charge VAT on the invoice; the customer accounts for it themselves. The work is the same, the money is different, and the invoice has to say what is happening.

It applies to standard-rated and reduced-rated construction services that fall under CIS, between two VAT-registered businesses, where the customer is not an end user or an intermediary supplier (VAT Act 1994 section 55A, in force since 1 March 2021). It does not apply to professional services such as an architect or a surveyor, to zero-rated work, to customers who are not VAT registered, or to supplies of staff. One more rule catches people out: if part of an invoice falls under the charge, the whole invoice does — unless that part is under 5% of the value.

Why it exists, briefly

It was introduced to stop VAT being charged, collected and then never passed on. Moving the accounting to the customer removes the step where the money sits with somebody who might not still be there. Knowing that helps with the shape of it: the rule is about who hands the money to HMRC, not about how much is due.

What it does to your cash flow

This is the part firms feel and do not expect. If you used to charge VAT and pay it over quarterly, that money was in your account in between. Under the reverse charge it never arrives. Nothing has been lost — but a business that had quietly been using its VAT balance as working capital finds out the hard way, usually two months in.

If most of your work moves onto the reverse charge, your VAT position may flip from paying to reclaiming, which changes what return frequency suits you. That is a conversation with your accountant, and it is worth having early.

What has to be on the invoice

• That the reverse charge applies, in words, with the customer told they must account for the VAT.
• The VAT rate that would have applied, or the amount, even though you are not charging it.
• The usual split between labour and materials, because CIS is still running underneath.

CIS does not stop applying because the VAT moved; the two run alongside each other and the labour and materials split serves both. See CIS for subcontractors.

HMRC gives two acceptable forms of words. Either "Reverse charge: VAT Act 1994 Section 55A applies", or "Reverse charge: Customer to pay the VAT to HMRC". Alongside it show the VAT rate and the amount the customer has to account for — shown, but not added into your total. Get your accountant to confirm the line once and then use it every time.

The end user question

The charge does not apply where the customer is an end user — broadly, someone having the work done for themselves rather than selling it on as construction. In practice that means the same firm can be inside the rules on Monday and outside them on Tuesday depending on who they are working for. The customer is supposed to tell you their status. Getting that in writing and keeping it against their record is what saves you rewriting invoices later.

Where software helps and where it does not

Software can hold the status against the customer, apply the right treatment consistently and keep the labour and materials split intact from the job through to the invoice. What it cannot do is decide whether the rules apply to your work. That decision is yours and your accountant's, and it is worth making once, per customer, rather than per invoice.