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The VAT domestic reverse charge

Six conditions, all of which have to hold. It uses the CIS definition of construction operations but is not part of the CIS — so gross payment status does not take you outside it, and absent a written notification the reverse charge is the default.

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UK trades and construction
In force
1 March 2021For invoices with a tax point on or after that date
Basis
VATA 1994 s55AScope follows the CIS definition, but it is not part of CIS
Default
Reverse chargeAbsent a written end-user notification

Six conditions, and all of them have to hold

The domestic reverse charge for building and construction services applies to invoices with a tax point on or after 1 March 2021, under section 55A of the VAT Act 1994. It applies where all six of the following are true.

  1. The supply is of construction services, and any materials supplied with them, falling within the CIS definition of construction operations.
  2. The supply is standard-rated at 20% or reduced-rated at 5%.
  3. Both supplier and customer are VAT registered in the UK.
  4. The customer is registered for CIS.
  5. Payment for the supply is reported within the CIS.
  6. The customer is neither an end user nor an intermediary supplier.

Miss any one and the normal VAT rules apply instead. The sequence matters, and it always runs the same way: is this a construction operation within CIS, is it CIS-reportable, are both parties VAT and CIS registered, and has the customer notified end-user or intermediary status? Only then is the VAT treatment settled. A business that gets CIS scope wrong gets its VAT wrong at the same moment, on the same invoice.

Where it does not apply

Zero-rated supplies are outside it — so new-build dwellings are not reverse-charged, which is why the zero-rate question has to be answered first. It does not apply to a customer who is not VAT registered, or not CIS registered, or who has notified you that they are an end user or an intermediary supplier. Supplies of workers by employment businesses are expressly excluded, which must be distinguished from labour-only construction services — those are caught.

The excluded services, supplied on their own, are the same list that sits outside CIS: oil and gas drilling and extraction; mineral extraction and underground works; the manufacture of building components, materials, plant or machinery; the professional services of architects, surveyors and consultants; artistic works; signwriting and installing advertisements; and installing seating, blinds, shutters and security systems.

Worth asking rather than assuming

A pure supply of materials with no services is not clearly addressed in HMRC's technical guide, and we would not assert a treatment for it. If that is what an invoice actually is, it is worth settling in writing with the customer before it goes out.

End users and intermediary suppliers

An end user is a VAT- and CIS-registered business that does not make onward supplies of the construction services it receives. The exclusion depends on them telling you in writing. HMRC suggests wording along the lines of: "We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Issue us with a normal VAT invoice, with VAT charged at the appropriate rate."

An intermediary supplier is a VAT- and CIS-registered business that buys construction services and resupplies them without material alteration to a connected or linked end user. The qualifying link is either a relevant interest in the same land — a landlord and tenant, for instance — or membership of the same corporate group as defined by section 1161 of the Companies Act 2006. Written notification works the same way.

The 5% disregard

Where the reverse-charge element is 5% or less of the total value of the supply, normal VAT rules may be applied to the whole thing. Three conditions on it: both parties have to agree at the outset of the contract, it is calculated on overall contract value rather than invoice by invoice, and it does not apply where zero-rating is the predominant element.

What it did to your cash, and what to do about it

Before March 2021 a subcontractor held its output VAT for up to four months between invoicing and the return date. That float is permanently gone from the cycle, and a business still budgeting on its old VAT-inclusive receipts is structurally short of working capital rather than badly run.

The other consequence is that a reverse-charged subcontractor usually becomes a repayment trader: no output VAT on sales, but input VAT on materials, fuel, plant hire and overheads. If that is your position, moving to monthly VAT returns turns a quarterly refund into a monthly one. And the Flat Rate Scheme generally stops working — with reverse-charged sales there is little VAT-inclusive turnover to apply a flat rate to, and relevant goods spend is low by definition.

Quick answers

Frequently asked

Does gross payment status take me outside the reverse charge?

No, and this is the most common misunderstanding about it. The reverse charge uses the CIS definition of construction operations to set its scope, but it is not part of the CIS. It applies where a payment has to be reported under the CIS regulations — not by reference to whether a deduction is actually made. A subcontractor with gross payment status is still within the reverse charge on the same work. Two separate questions, answered separately, on the same invoice.

What if my customer has not told me they are an end user?

Then you apply the reverse charge. The default is the reverse charge, not the normal charge, and the end user and intermediary supplier exclusions both depend on the customer notifying you in writing. Once they have notified you, you do not need to seek further evidence. Absent that notification, charging VAT normally creates an error on both sides of the transaction — so the notifications are worth collecting before you invoice rather than after somebody queries it. HMRC publishes suggested wording for the notification, and using it removes any argument about whether what you hold is sufficient.

Is a labour-only supply caught, or is that a supply of staff?

Labour-only construction services are caught. Supplies of workers by employment businesses are expressly excluded. The distinction is real and it is not about how much labour is involved — it is about whether you are supplying construction services or supplying people. If you are contracted to carry out construction operations and you happen to bring no materials, that is a labour-only construction service and the reverse charge applies to it. The exclusion for supplies of workers by an employment business is about who is contracting for what, not about whether the workers turn up with tools.

What has to be on the invoice?

All the normal VAT invoice particulars, plus a clear statement that the reverse charge applies and that the customer is required to account for the VAT. You show the VAT amount due, or the rate, for the customer's information — and that amount must not be included in the total you charge them. HMRC's accepted forms of wording include “Reverse charge: VAT Act 1994 Section 55A applies” and “Reverse charge: Customer to pay the VAT to HMRC”. What is not sufficient is a silent invoice with no VAT and no explanation, because the customer cannot tell a reverse charge supply from a zero-rated one or an unregistered supplier.

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