The VAT domestic reverse charge

Building and construction services (CIS)

Since 1 March 2021, HMRC says the reverse charge must be used for most supplies of building and construction services. As a supplier you must use it when all of these apply:

• You are VAT registered in the UK and supply building and construction services
• Your customer is VAT registered in the UK
• The payment is reported under CIS
• The services are standard-rated or reduced-rated
• You are not an employment business supplying staff or workers
• Your customer has not told you in writing that they are an end user or an intermediary supplier

When the construction reverse charge does not apply

If the reverse charge does not apply, the normal VAT rules apply and the supplier charges VAT in the usual way. HMRC's technical guide lists, among others:

• Supplies to end users and intermediary suppliers who have told their supplier so in writing
• Supplies to customers who are not VAT registered
• Supplies of staff or workers by employment businesses
• Zero-rated work, such as zero-rated new build housing
• Hire of goods only
• Services such as architects' and surveyors' professional work when supplied on their own

Mixed contracts

Where reverse charge services are only a small part of a wider supply, HMRC's technical guide lets both parties disregard them and use the normal rules, if they agree this at the start of the contract and judge it on the whole contract value, not invoice by invoice. Check section 7 of the technical guide for the exact test.

The other specified goods and services

VAT Notice 735 applies the domestic reverse charge to these supplies between VAT-registered businesses. For mobile phones and computer chips it only applies above a minimum value per invoice, which is set out in the notice.

• Mobile phones
• Computer chips
• Wholesale gas
• Wholesale electricity
• Emissions allowances
• Wholesale telecommunications services
• Renewable energy certificates

What the invoice must show

The supplier's invoice must make clear that the reverse charge applies, include the words "reverse charge", and show how much VAT is due under the reverse charge without adding it to the amount the customer pays. VAT Notice 735 gives "reverse charge: VAT Act 1994 Section 55A applies" as an example of acceptable wording.

Which VAT return boxes to use

As the supplier: do not enter any output tax on the sale. Put the VAT-exclusive value of the sale in box 6.

As the customer: add the reverse charge VAT to box 1, reclaim it in box 4 subject to the normal rules, and put the VAT-exclusive value of the purchase in box 7. Do not put it in box 6, because it is not a sale.

Cash accounting and the Flat Rate Scheme

You cannot use the Cash Accounting Scheme for reverse charge supplies you make or receive. You can still use it for your other transactions.

Reverse charge supplies are not accounted for under the Flat Rate Scheme. A Flat Rate Scheme user who receives them accounts for the VAT due and recovers it at the same time on the same return. A Flat Rate Scheme user who makes them leaves their value out of the flat rate calculation.

Common mistakes

• Charging VAT as a subcontractor on work that falls under the construction reverse charge.
• Applying the reverse charge to a customer who has told you in writing they are an end user or intermediary supplier.
• As the customer, entering the purchase value in box 6 as if it were a sale.
• As the customer, forgetting the box 1 entry, so the VAT is reclaimed in box 4 without being declared.
• Using cash accounting for reverse charge supplies.

Sources

• GOV.UK, Check when you must use the VAT domestic reverse charge for building and construction services
• HMRC, VAT domestic reverse charge technical guide
• GOV.UK, How to use the VAT domestic reverse charge if you supply building and construction services
• GOV.UK, How to use the VAT domestic reverse charge if you buy building and construction services
• HMRC, Domestic reverse charge procedure (VAT Notice 735)