Reverse charge VAT: who it applies to and who it doesn't

The domestic reverse charge for construction has been in force since March 2021 and we still see it applied wrongly on a large share of the invoices that come through new clients' books. Here's the short version.

When it applies

All of the following must be true: the supply is of construction services within the scope of CIS, both parties are VAT-registered, both are CIS-registered, the supply is standard or reduced rated, and the customer is not an end user or intermediary who has told you so in writing.

What it means on the invoice

You don't charge VAT. You show the VAT rate and amount that would apply, and a statement that the reverse charge applies and the customer must account for the VAT. The customer accounts for both output and input VAT on their own return.

The mistakes we see most

• Charging VAT to a contractor who should have been reverse charged, then having the invoice rejected and the payment delayed
• Reverse charging an end user (a homeowner, a landlord occupying the building, a developer selling it) who never told you in writing, but should have been charged VAT anyway because they aren't making onward construction supplies
• Applying the reverse charge to materials-only supplies
• Not moving to monthly VAT returns when the reverse charge puts you consistently in repayment

The cash flow effect

Subcontractors lose the VAT they used to hold between invoicing and paying HMRC. That was a working-capital cushion for a lot of businesses, and its removal is one of the reasons cash forecasting matters more than it did.

This article is general guidance and not advice on your circumstances. Talk to your accountant before acting on it.