The VAT domestic reverse charge changes which business accounts for VAT on certain transactions.
Under normal VAT rules, a supplier charges VAT to its customer, collects the payment and later pays the output VAT to HM Revenue and Customs. Under the domestic reverse charge, the supplier does not collect the VAT. Instead, the VAT-registered customer calculates and reports the VAT through its own VAT return.
The procedure is an anti-fraud measure designed to prevent businesses from collecting VAT from customers and disappearing before paying it to HMRC.
The domestic reverse charge applies only to specified goods and services. It is particularly important within the construction industry, where it has applied to qualifying supplies since 1 March 2021.
This guide explains how the domestic reverse charge works, when construction businesses must use it and how affected transactions should be recorded and invoiced.
What Is the VAT Domestic Reverse Charge?
The domestic reverse charge transfers responsibility for accounting for VAT from the supplier to the customer.
Where the reverse charge applies:
- The supplier issues an invoice without adding the VAT to the amount payable.
- The invoice states that the domestic reverse charge applies.
- The customer calculates the VAT that would normally have been charged.
- The customer reports that amount as output VAT on its VAT return.
- The customer may normally reclaim the same amount as input VAT, subject to the usual VAT recovery rules.
The reverse charge does not remove the VAT liability or change the applicable VAT rate. It changes which party reports and pays the VAT to HMRC.
Domestic and Overseas Reverse Charges Are Different
The domestic reverse charge should not be confused with the reverse charge that can apply when a UK business purchases services from an overseas supplier.
The domestic procedure applies to specified supplies between UK businesses. Cross-border services are subject to separate place-of-supply and VAT rules.
Which Goods and Services Are Covered?
The domestic reverse charge can apply to specified supplies of:
- Mobile phones.
- Computer chips.
- Wholesale gas.
- Wholesale electricity.
- Emission allowances.
- Wholesale telecommunications services.
- Renewable energy certificates.
- Qualifying building and construction services.
The precise rules differ between these categories. A business should use the guidance relating to the particular goods or services it supplies rather than assuming that every domestic reverse charge works in exactly the same way.
The £5,000 Threshold for Mobile Phones and Computer Chips
For mobile phones and computer chips, the reverse charge normally applies where the total VAT-exclusive value of qualifying goods on an invoice is £5,000 or more.
Once the threshold is reached, the reverse charge applies to the full value of the qualifying goods on the invoice. The first £5,000 is not excluded.
The £5,000 threshold does not apply to wholesale gas, wholesale electricity, emission allowances, wholesale telecommunications services or renewable energy certificates.
The construction reverse charge also has no equivalent £5,000 invoice threshold.
How the Construction Domestic Reverse Charge Works
The construction domestic reverse charge applies to many supplies between contractors and subcontractors in a construction supply chain.
It must normally be used where all the following conditions are met:
- The supplier is registered for VAT in the UK.
- The customer is registered for VAT in the UK.
- The services fall within the scope of the Construction Industry Scheme.
- The payment is reported under the Construction Industry Scheme.
- The supply is subject to VAT at the standard or reduced rate.
- The supply is not simply the provision of workers by an employment business.
- The customer has not provided written confirmation that it is an end user or qualifying intermediary supplier.
If every condition is met, the supplier normally issues a reverse charge invoice instead of charging VAT under the usual procedure.
Construction Services Covered by the Reverse Charge
The construction reverse charge uses the definition of construction operations covered by CIS, subject to specific VAT exclusions.
Qualifying services can include:
- Constructing, altering, repairing, extending or demolishing buildings and structures.
- Groundworks, excavation and laying foundations.
- Roadworks, pipelines, sewers and drainage works.
- Installing heating, lighting, power, ventilation and air-conditioning systems.
- Installing water supply, sanitation, drainage and fire-protection systems.
- Painting and decorating buildings and structures.
- Internal cleaning undertaken as part of construction, alteration, repair or restoration.
- Site clearance, earth-moving and excavation.
- Erecting scaffolding as part of a qualifying construction supply.
- Landscaping that forms part of the preparation or completion of construction work.
The fact that work is covered by CIS does not by itself prove that the reverse charge applies. VAT status, the applicable VAT rate and the customer’s end-user position must also be checked.
Services That Are Normally Excluded
The reverse charge does not normally apply to the following services when they are supplied on their own:
- Architectural and surveying services.
- Engineering, interior design, exterior design and landscape consultancy.
- Manufacturing building components, equipment or materials and delivering them to site without installation.
- Installing seating, blinds or shutters.
- Installing burglar alarms, CCTV and public-address systems.
- Signwriting and installing or repairing advertisements and signboards.
- Creating or installing purely artistic works.
- Hiring goods or plant without an operator.
- The supply of construction workers by an employment business.
Some of these services may become part of a wider single construction supply. The VAT treatment should therefore be considered using the complete contract rather than individual invoice descriptions alone.
Zero-Rated Construction Work
The construction reverse charge applies only to services subject to VAT at the standard or reduced rate.
It does not apply to supplies that are genuinely zero-rated, such as qualifying construction services relating to certain new residential buildings.
The correct VAT liability must be established before deciding whether the reverse charge applies. A service should not be treated as zero-rated simply because it relates to a residential property.
Who Is an End User?
An end user is generally a VAT and CIS-registered business that receives construction services for its own use rather than making an onward supply of those construction services.
Potential examples include:
- A property-owning business paying for work on its own office.
- A retailer engaging a contractor to refurbish its shop.
- A manufacturing company paying for construction work at its factory.
- A commercial landlord purchasing works for a property it holds, depending on the contractual arrangement.
The reverse charge does not apply where the customer confirms its end-user status to the supplier in writing. The supplier should then apply the normal VAT rules and charge VAT at the appropriate rate.
End-user treatment is optional. If a customer that qualifies as an end user does not provide written notification, the supplier should normally apply the reverse charge where the remaining conditions are satisfied.
Example End-User Wording
A written notification could state:
We confirm that we are an end user for the purposes of the VAT domestic reverse charge for building and construction services. Please issue invoices using the normal VAT rules.
The notification can be provided by email, letter or within an agreed contract. It should clearly identify the supplies or projects covered and should be retained with the business records.
What Is an Intermediary Supplier?
An intermediary supplier is generally a VAT and CIS-registered business that purchases construction services and resupplies them to a connected or linked end user without making material changes to the supply.
The parties may be connected because:
- They are members of the same corporate group.
- They have a relevant interest in the same land, such as a landlord and tenant.
An intermediary supplier can provide written notification to its supplier and be treated in a similar way to an end user. Normal VAT is then charged rather than the reverse charge being applied.
Private Domestic Customers
The reverse charge does not apply to construction services supplied directly to an ordinary private householder because the customer is not registered for VAT and CIS.
The contractor should apply the normal VAT rules to its invoice to the householder.
However, subcontractors working for that contractor may still need to use the reverse charge. The fact that the final customer is a householder does not automatically make the main contractor an end user.
Employment Businesses and Labour-Only Subcontractors
A distinction must be made between supplying workers and supplying construction services.
An employment business that merely supplies workers is treated as supplying staff. Its supply is not subject to the construction reverse charge, even where the workers carry out construction operations.
A labour-only subcontractor may still be supplying construction services rather than staff. Where the subcontractor is responsible for completing construction work and the other conditions are met, the reverse charge can apply.
The contract and working arrangement should be reviewed rather than relying solely on the description “labour only”.
Materials Supplied With Construction Services
Where goods or materials are supplied as part of a single construction service, the reverse charge normally applies to the full value of the supply.
For example, a subcontractor that supplies and installs flooring should not normally separate the flooring materials from the installation labour to avoid applying the reverse charge.
The same principle can apply where separate labour and material invoices relate to one supply-and-fix order.
A genuine materials-only sale made under a separate order may fall outside CIS and the construction reverse charge. Normal VAT rules would then generally apply.
The 5% Disregard
Where a single supply contains both reverse charge and non-reverse charge construction elements, the reverse charge will normally apply to the entire supply.
HMRC permits a limited concession where the reverse charge element represents 5% or less of the total contract value. The supplier and customer must agree from the beginning of the contract that the disregard will apply.
The 5% test is based on the overall contract rather than being recalculated separately for each invoice.
The rule can be complex and should not be used simply to split or restructure invoices artificially.
A Construction Reverse Charge Decision Checklist
Before issuing an invoice, the supplier should consider the following questions:
- Is the supplier registered for VAT in the UK?
- Is the customer registered for VAT in the UK?
- Is the service within the scope of CIS?
- Will the payment be reported under CIS?
- Is the supply standard-rated or reduced-rated rather than zero-rated?
- Is the supplier providing construction services rather than workers as an employment business?
- Has the customer failed to provide written end-user or intermediary-supplier notification?
If the answer to all seven questions is yes, the construction reverse charge will normally apply.
What Suppliers Need to Do
A supplier of construction services should establish the correct VAT treatment before issuing the invoice.
The supplier should:
- Confirm that the customer has a valid UK VAT registration number.
- Confirm that the customer is registered or operating as a contractor under CIS.
- Establish whether the service falls within CIS.
- Determine whether the supply is standard-rated, reduced-rated or zero-rated.
- Ask whether the customer is an end user or intermediary supplier.
- Retain any written notification received from the customer.
- Issue an invoice containing the required reverse charge wording.
- Record the sale correctly in the accounting system and VAT return.
Where the customer appears to be an end user but has not confirmed that status in writing, the supplier should normally apply the reverse charge if the remaining conditions are met.
What Customers Need to Do
A customer receiving construction services should tell the supplier whether the reverse charge applies.
The customer should:
- Confirm its VAT and CIS status.
- Consider whether it is making an onward supply of the construction services.
- Provide written end-user or intermediary-supplier notification where appropriate.
- Check that the supplier’s invoice applies the correct VAT treatment.
- Calculate the VAT due under the reverse charge.
- Record the output VAT and any recoverable input VAT in the correct VAT return period.
- Notify suppliers if its status changes during a contract.
A customer should not pay VAT shown incorrectly on a reverse charge invoice without first asking the supplier to review and correct the document.
How to Prepare a Reverse Charge Invoice
A reverse charge invoice must contain the information normally required on a VAT invoice.
It must also:
- State clearly that the reverse charge applies.
- Explain that the customer is responsible for accounting for the VAT.
- Show the VAT rate or the amount of VAT the customer must account for.
- Exclude the reverse charge VAT from the total amount payable to the supplier.
Suitable wording could include:
Reverse charge: customer to account to HMRC for VAT.
The invoice may also refer to section 55A of the Value Added Tax Act 1994.
Construction Reverse Charge Example
A VAT-registered electrical subcontractor supplies qualifying installation work to a VAT and CIS-registered main contractor.
The work is standard-rated and the main contractor will resupply the construction service to its customer. The main contractor has not provided an end-user notification.
The subcontractor’s charge is £10,000 excluding VAT.
| Invoice Item | Amount |
|---|---|
| Electrical installation services | £10,000 |
| VAT due under reverse charge at 20% | £2,000 |
| Amount payable to subcontractor | £10,000 |
The subcontractor does not collect the £2,000 VAT. The main contractor accounts for £2,000 as output VAT and may normally reclaim £2,000 as input VAT, subject to the usual recovery rules.
How Suppliers Complete the VAT Return
Where a supplier makes a reverse charge sale:
- The supplier does not include output VAT for that transaction in box 1.
- The VAT-exclusive value of the sale is included in box 6.
The accounting software should use a reverse charge VAT code designed for sales rather than a normal standard-rate sales code.
How Customers Complete the VAT Return
Where a customer receives a qualifying reverse charge purchase:
- The VAT calculated under the reverse charge is included as output VAT in box 1.
- The recoverable input VAT is included in box 4, subject to the normal VAT recovery rules.
- The VAT-exclusive purchase value is included in box 7.
- The purchase value is not included as a sale in box 6.
A fully taxable customer will often report the same amount in boxes 1 and 4, creating no net VAT cost. A partially exempt business or a business with restricted VAT recovery may not be entitled to reclaim the full amount.
Cash Accounting Scheme
The VAT Cash Accounting Scheme cannot be used for supplies or purchases that are subject to the domestic reverse charge.
A business may continue using cash accounting for its other transactions, but reverse charge items must be dealt with separately using the appropriate rules and tax points.
Flat Rate Scheme
Reverse charge sales are excluded from the supplier’s Flat Rate Scheme calculation.
A Flat Rate Scheme business receiving reverse charge services must account for the VAT due outside the normal flat-rate calculation. It may reclaim the VAT on the same return, subject to the normal rules.
Subcontractors making significant reverse charge sales should review whether the Flat Rate Scheme remains beneficial, particularly because they will no longer receive VAT from customers on those supplies.
Cash Flow Effects
The reverse charge can have a significant cash flow effect on subcontractors.
Under normal VAT accounting, a subcontractor may collect VAT from customers before paying it to HMRC. Under the reverse charge, the customer pays only the net invoice value.
This can mean that a subcontractor:
- Receives less cash from customers.
- Continues paying VAT on materials and overheads.
- Regularly submits repayment VAT returns.
- Needs to reconsider its cash flow forecasts.
Businesses that regularly receive VAT repayments may consider whether monthly VAT returns would improve cash flow.
Common Domestic Reverse Charge Mistakes
- Applying it to every CIS transaction: CIS status is only one part of the construction reverse charge test.
- Applying it to zero-rated construction work: The construction reverse charge applies only to standard-rated and reduced-rated supplies.
- Charging VAT to a contractor when the reverse charge applies: The supplier should normally invoice only the VAT-exclusive amount.
- Failing to obtain written end-user confirmation: A verbal statement is not sufficient for the supplier to stop applying the reverse charge.
- Assuming the final householder makes every contractor an end user: Subcontractor supplies to the main contractor may still be subject to the reverse charge.
- Separating labour and materials artificially: A single supply-and-fix service will normally be subject to one VAT treatment.
- Using a normal VAT code in the accounting software: This can place figures in the wrong VAT return boxes.
- Paying VAT shown incorrectly: The customer should ask the supplier to correct the invoice.
- Confusing workers with construction services: Employment-business supplies and labour-only subcontracting can receive different treatment.
- Ignoring changes during a contract: A customer must notify the supplier when its end-user or intermediary status changes.
Records Businesses Should Keep
Businesses should retain records supporting the VAT treatment applied.
These can include:
- Customer and supplier VAT registration details.
- CIS verification and registration information.
- Contracts, quotations and purchase orders.
- End-user and intermediary-supplier notifications.
- Invoices and credit notes.
- Evidence supporting the VAT rate applied.
- Calculations used for the 5% disregard.
- VAT return reports from the accounting software.
- Correspondence concerning changes in customer status.
Clear records are particularly important where a transaction could reasonably be treated in more than one way.
How Carter Bookkeeping Services Can Help
Carter Bookkeeping Services can help construction businesses organise and record domestic reverse charge transactions correctly.
Support can include:
- Setting up reverse charge VAT codes in accounting software.
- Reviewing sales and purchase invoice processes.
- Separating normal VAT and reverse charge transactions.
- Reconciling reverse charge control accounts.
- Checking that transactions feed into the appropriate VAT return boxes.
- Maintaining end-user and supplier records.
- Preparing organised records for VAT returns.
- Completing a holistic bookkeeping review of existing VAT records.
The legal and VAT treatment of complex construction contracts can depend on the precise services, contractual relationships and status of each business. Specialist VAT advice may be required where the correct treatment is uncertain.
Frequently Asked Questions
Does the Reverse Charge Apply to Every Construction Invoice?
No. The supply must satisfy the VAT, CIS, service and customer-status conditions. It does not apply automatically to every construction transaction.
Does the Reverse Charge Apply to Materials?
Materials supplied as part of a single construction service normally follow the VAT treatment of the overall service. A genuine materials-only sale under a separate order may be outside the reverse charge.
Does the Reverse Charge Apply to Private Customers?
No. A private householder is not normally VAT and CIS registered, so the contractor applies the normal VAT rules.
Does It Apply to New-Build Houses?
Qualifying zero-rated construction services are not subject to the reverse charge. Standard-rated services connected with a new-build project may require separate consideration.
Does an End User Have to Notify the Supplier?
Yes, if the customer wants the supplier to apply normal VAT treatment. The notification must be provided in writing and retained as part of the records.
Does the Customer Pay VAT to the Supplier?
No. The customer pays the VAT-exclusive invoice amount to the supplier and accounts for the VAT through its VAT return.
Can the Customer Reclaim the Reverse Charge VAT?
Normally, subject to the usual input VAT rules. A partially exempt business or a business with restricted recovery may not be able to reclaim the full amount.
Does Gross Payment Status Under CIS Prevent the Reverse Charge?
No. CIS deduction status and VAT treatment are separate. A payment can be made gross under CIS while the VAT domestic reverse charge still applies.
What Happens If VAT Is Charged Incorrectly?
The supplier should normally issue a corrected invoice or credit note. Both businesses should correct their accounting records and VAT returns where necessary.
Check the Treatment Before Issuing the Invoice
The domestic reverse charge affects invoices, accounting records, VAT returns and cash flow. The correct treatment should therefore be established before an invoice is sent or paid.
Construction businesses should confirm the nature of the work, the VAT and CIS status of both parties and whether the customer has provided written end-user or intermediary-supplier notification.
Contact Carter Bookkeeping Services to discuss bookkeeping and VAT record support for domestic reverse charge transactions.