The VAT reverse charge, and what your invoice has to say

When it applies, and it is all of these or none

The reverse charge applies when every one of the following is true. Miss one and you invoice the old way, with VAT charged as normal.

• Your customer is registered for VAT.
• Your customer is registered for the Construction Industry Scheme.
• The services are within the scope of CIS.
• The supply is standard rated at 20% or reduced rated at 5%, rather than zero rated.
• You are supplying construction services rather than staff, so an employment business is outside it.
• Your customer has not notified you in writing that they are an end user or an intermediary supplier.

What has to be on the invoice

The invoice carries everything a VAT invoice normally carries, plus a note making clear that the reverse charge applies and that the customer is the one accounting for the VAT. You also have to show how much VAT is due under the reverse charge, or, where you cannot show the amount, the rate. What you must not do is include that VAT in the amount you are charging.

HMRC accepts more than one form of wording, as long as the meaning is unmistakable. "Reverse charge: VAT Act 1994 Section 55A applies", "Reverse charge: S55A VATA 94 applies" and "Reverse charge: customer to pay the VAT to HMRC" are all on its own list of acceptable phrasing.

In practice the money line and the wording line have to agree. The customer pays the net figure. The VAT is shown for their benefit and collected by nobody.

Labour and materials                        £2,400.00
VAT (reverse charge, 20%)                     £480.00
Total payable                               £2,400.00

Reverse charge: VAT Act 1994 Section 55A applies.
Customer to account for the VAT to HMRC.

The end user statement, and why you want it in writing

An end user is a VAT and CIS registered business that is not going to resupply the construction services: the developer, the landlord, the business having the work done for itself. An intermediary supplier is connected to an end user, by being in the same corporate group or holding an interest in the same land, and can notify you in the same terms.

Where a customer gives you that notification, you invoice them normally with VAT charged at the appropriate rate, and the reverse charge does not apply. It has to come from them and it has to be in writing, which is entirely in your interest. Without it, VAT charged on a supply that should have been reverse charged is your error rather than theirs.

HMRC publishes the wording. Ask for exactly this, by email, and keep it with the job file.

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. We will not account for the reverse charge.

When it does not apply at all

Work for a homeowner is the big one. A private customer is not VAT registered and is not in CIS, so the reverse charge cannot apply and you charge VAT exactly as you always did. A mainly domestic trade will meet it rarely, if ever.

It does not touch a zero-rated supply either, which takes new build housing out of it. And it cannot apply if you are not VAT registered, because there is no VAT to reverse. Being in CIS on its own is not enough, in either direction.

Some services sit outside it even between two registered businesses: drilling for oil or gas, extracting minerals, manufacturing building components off site, the professional work of architects and surveyors, installing seating, blinds and shutters, signwriting, and installing security systems. The test is the service rather than the customer, so one invoice to a regular client can genuinely need treating differently from the last.

What it does to your cashflow, which is the part nobody warns you about

Before the reverse charge, a VAT-registered subcontractor collected 20% on every invoice and held it until the quarter end. It was never your money, but it was in your account, and a lot of businesses were quietly running on it.

Under the reverse charge that stops. You still pay VAT on materials, so input tax keeps going out while no output tax comes in on the affected work. For a trade that mostly subcontracts, the result is a business permanently in a repayment position with HMRC.

The usual answer is to move to monthly VAT returns, which turns a quarterly wait for a repayment into a monthly one. It is a small administrative change, and it is worth making in the same month you start reverse charging rather than after a quarter has proved the point.

The second answer is to stop treating a VAT balance as a buffer. Once a real share of your invoices carry no VAT, a quarter end that used to feel comfortable stops being comfortable, and it is better to find that out on purpose.

What your customer does with it

Worth knowing, because you will be asked. The customer adds the VAT you showed to the output tax on their return as though they had charged it themselves, then reclaims it as input tax under the normal rules. They do not enter the net value of your invoice as a net sale.

For most contractors it nets out to nothing and costs them a line of bookkeeping, which is why the usual friction is not money but a new accounts clerk querying an invoice with no VAT on it. The wording on the invoice is what answers that query without a phone call.