The VAT domestic reverse charge for construction services

When it applies

• The customer is registered for VAT and for CIS (HMRC's reverse charge technical guide).
• The services are within the scope of CIS and payment for them is reported under CIS.
• The services are standard-rated or reduced-rated. Zero-rated work is outside it.
• The customer has not told the supplier in writing that it is an end user or an intermediary supplier.

How it works

Where the reverse charge applies, the supplier does not charge VAT, and the liability to account for the VAT shifts to the customer (HMRC manual VATREVCON31000).

The supplier enters nothing in box 1 for the sale and puts its net value in box 6. The customer enters the VAT that the supplier would have charged in box 1 and, under the normal rules, reclaims the same amount in box 4. The net values go in boxes 6 and 7 as usual.

For example, a subcontractor invoices a main contractor £10,000 for standard-rated labour and materials. The invoice shows VAT at 20% of £2,000 to be accounted for by the customer. The subcontractor puts £10,000 in box 6 and nothing in box 1. The contractor puts £2,000 in box 1, £2,000 in box 4 and £10,000 in box 7.

Services within the reverse charge

• Constructing, altering, repairing, extending, demolishing or dismantling buildings and structures, and works forming part of the land (GOV.UK).
• Installing heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems.
• Internal cleaning of buildings during construction, and painting or decorating.
• Work that forms an integral part of these, such as site clearance, earth-moving, excavation, foundations, scaffolding, site restoration, landscaping and roadways.

Services outside it

• Drilling for or extracting oil or natural gas, and extracting minerals (GOV.UK).
• Manufacturing building or engineering components.
• The professional work of architects and surveyors.
• Making, installing and repairing artworks, and signwriting.
• Installing seating, blinds and shutters, and installing security systems.

End users and intermediary suppliers

An end user is a business, or group of businesses, registered for VAT and CIS that does not make onward supplies of the construction services it receives (technical guide).

An intermediary supplier is registered for VAT and CIS and is connected or linked to an end user, either through a relevant interest in the land, such as a landlord and tenant, or as part of the same group under section 1161 of the Companies Act 2006.

An end user or intermediary supplier tells its supplier in writing, and from then on the reverse charge does not apply to supplies to it. The guide accepts post, email or a term in the contract. Once given, the notice need not be reissued if the customer moves between end user and intermediary status. Without written notice, the supplier applies the reverse charge.

The 5% disregard

If a single supply mixes reverse charge work with other elements, the whole supply follows the reverse charge. Where the reverse charge part is 5% or less of the value of the whole supply, it can be disregarded and normal VAT charged, provided supplier and customer agree this from the start of the contract (technical guide).

Invoice wording

A reverse charge invoice must say that the reverse charge applies. The technical guide gives as acceptable wording "VAT Act 1994 Section 55A applies", "S55A VATA 94 applies" or "Customer to pay the VAT to HMRC".

Interaction with other schemes

• Cash accounting cannot be used for supplies bought or sold under the reverse charge (technical guide).
• A flat rate business that receives reverse charge supplies accounts for the VAT and recovers it at the same time. One that makes reverse charge supplies leaves their value out of its flat rate turnover.
• If the customer is not registered for VAT, the reverse charge cannot apply and normal VAT accounting is used.

Questions