The domestic reverse charge for construction, explained

The domestic reverse charge moves the job of paying VAT to HMRC from the supplier to the customer. It has applied since 1 March 2021 to construction services within the Construction Industry Scheme (CIS) supplied between VAT-registered businesses. It changes who accounts for the VAT. It does not change the rate.

What it is and when it applies

Under the normal rules a subcontractor adds VAT to the invoice and pays it to HMRC, and the contractor reclaims it. Under the reverse charge the subcontractor invoices the net amount only. The contractor accounts for the VAT on their own return instead.

In broad terms it applies where both businesses are VAT registered, the work is a construction service within the CIS, and the supply is standard rated or reduced rated. It does not apply to:

• Zero-rated work. A subcontractor on a new build home invoices at 0% in the ordinary way. There is no VAT to reverse.
• Homeowners. A builder working for a private customer charges VAT normally.
• End users. A developer who will sell or let the finished building, and has said so in writing, is charged VAT in the normal way.

HMRC's guidance is in VAT Notice 735 and its reverse charge technical guide.

It does not change the rate

As an example only, take £40,000 of subcontract work on an office being converted into flats, where the work qualifies for the reduced rate. Under the normal rules the subcontractor would invoice £40,000 plus £2,000 VAT at 5%. Under the reverse charge the invoice is for £40,000, and the contractor accounts for the £2,000.

The rate is 5% in both versions. The reverse charge has not touched it.

What people get wrong

• "The rate stops mattering because the VAT nets off." It does not. You cannot tell whether the reverse charge applies until you know the rate, because zero-rated work is outside it altogether. And at the top of the chain somebody is charged VAT at 5% or 20% under the normal rules.
• "No VAT on the invoice means no VAT on the job." The VAT is still due. It is on the customer's return.
• "It is 20% by default." A reverse charge invoice at 20% for work that should be 5% is a wrong invoice, and both parties then put wrong figures on their returns.

Where it goes wrong

• Whether each element of the works is zero rated, reduced rated or standard rated, which decides whether the reverse charge is in play at all.
• Whether the customer's end user status has actually been confirmed, or only assumed.
• Projects with more than one rate, where part of the work is inside the reverse charge and part is outside. See mixed use and apportionment.
• Subcontract packages run at one rate and the main contract at another.

The sensible next step

Keystone determines the rate, and does not do bookkeeping, file VAT returns or act as agent with HMRC. If you are a contractor or subcontractor pricing a job, send us the quote or the tender documents. We will tell you whether there is anything worth pursuing, the fee is fixed and agreed first, and if the answer is 20% we will say so.