What is the VAT reverse charge scheme?
The VAT Domestic Reverse Charge for construction was introduced to reduce VAT fraud in the industry.
Under the scheme, the responsibility for accounting for VAT moves from the supplier to the customer.
If this sounds confusing, don’t worry! The worked example below makes it easy to understand.
When does the VAT reverse charge apply?
The domestic reverse charge applies when all of the following are true:
Both businesses are VAT registered
The work is standard rated or reduced rated
The work comes under CIS (construction services)
The customer is not an end user or intermediary supplier
In simple terms, if you are supplying construction services to another VAT registered contractor who will use your work as part of their own onward supply, the reverse charge applies.
Worked example (normal VAT vs reverse charge)
Standard VAT example
A supplier invoices a VAT registered contractor:
£1,000 net
£200 VAT
£1,200 total
The supplier collects £1,200 and pays the £200 VAT to HMRC.
The customer reclaims the £200 VAT from HMRC.
Reverse charge example
Under the domestic reverse charge, the supplier invoices:
£1,000 net
£0 VAT
£1,000 total
The invoice must clearly state:
‘Reverse charge applies - customer to account for VAT at 20%.
What happens on the VAT return?
Supplier:
Records £1,000 sale
No VAT goes through their books
Customer:
Accounts for £200 VAT as output tax
Reclaims the same £200 as input tax
The net effect is £0
What work comes under the reverse charge?
Most CIS regulated construction work comes under the reverse charge scheme, such as:
Groundworks
Bricklaying
Electrical installation
Plumbing
Scaffolding
Roofing
Labour only subcontractors
When does the reverse charge not apply?
The reverse charge does not apply when:
Work is done for end users
Zero rated work (for example new builds)
Architects or surveyors
Supply only materials
Cleaners (unless builders' clean)
FAQs
Some of these will have been answered in the blog, but in case you skimmed it, here they are:
Do customers reclaim VAT under the reverse charge?
Yes, customers account for VAT as both output and input VAT in the same return.
Does reverse charge apply to materials?
Yes, if materials are supplied with construction services.
Does reverse charge apply to labour only subcontractors?
Yes, almost always.
How should the supplier word the invoice?
They should put a note anywhere on the invoice stating ‘reverse charge - customer to account for VAT at the appropriate rate’.
Do you need help applying the VAT domestic reverse charge?
If you’re not sure whether the scheme applies to your work, or you have any further questions, please reach out to us at office@constructiononeaccountants.uk and we will be in touch to assist you.