What is VAT reverse charge in the construction sector?, image of construction workers discussing plans | Crunch

VAT reverse charge rules came into effect on 1st March 2021, altering the way businesses operating the Construction Industry Scheme (CIS) and who are VAT registered present their invoices.

These new rules are complex, and you’ll need to be aware of what they may mean for your business’s sales invoices and VAT returns.

What is the VAT reverse charge?

The reverse charge is a way of accounting for VAT where the end-customer accounts for VAT and the supplier of construction services doesn’t. The reverse charge means the end-customer receiving construction services has to pay the VAT to HMRC instead of the supplier. The end-customer recovers VAT subject to the normal rules set by HMRC.

How are the new rules applied?

The new rules apply to standard rate VAT or reduced-rate construction services provided by VAT registered businesses. The reverse charge doesn’t apply to supplies of services which are zero-rated, such as the construction of housing. If you don’t make an onward supply of construction services, you won’t have an end-customer and normal VAT rules apply. 

By way of example, a Housing Association (that has contracted a building company to construct apartments) won’t be making any onward supply of construction services so normal VAT rules will apply between the building company and the Housing Association.  

If invoices have both CIS and non-CIS registered supplies, the reverse charge applies to the whole invoice amount.

A typical situation where the reverse charge applies is where a sub-contractor makes a supply of services to a customer (or contractor) who then makes an onward supply of the same construction services to an end-customer. A typical supply chain is shown below. All parties in the chain are VAT registered. When the end-customer confirms they are the end of the supply chain, normal VAT rules apply.

How does this affect me?

That depends on your position in the supply chain highlighted above. You can use the following flowchart to work out if you should apply the reverse charge or whether normal VAT rules apply.

What do I have to do?

If you are a subcontractor

If you’re invoicing a customer (or contractor) in a supply chain, you’ll either have to charge VAT as normal or apply the reverse charge. For the reverse charge, your invoice total will not include VAT. 

However, your invoice must include a statement advising your customer (or contractor) that the reverse charge rules apply, stating the amount of output VAT to be applied (20% if it’s the standard rate of VAT). Your customer (or contractor) will need to include that amount on their VAT return. You don’t include anything on your VAT return about the reverse charge.

If you are a main contractor

If you’re a main contractor receiving a VAT reverse charge invoice from a subcontractor, you should continue to record it as a normal expense invoice and include input VAT on your VAT return. 

You’ll also need to account for the reverse charge VAT the subcontractor has notified you about. The overall effect on your VAT liability is neutral as the output VAT is covered by the input VAT.

Other matters

It may be possible to be a subcontractor on one project and a main contractor on another, so you need to consider the VAT status of your services for each construction project you work on.

If you’re currently on the Flat Rate VAT Scheme and the majority of your supplies are affected by the VAT reverse charge, you might want to consider changing to the Standard VAT scheme as:

  • The Flat Rate Income amount will be reduced, possibly to nil
  • You’ll be losing the opportunity to reclaim input VAT on expenses.

We recommend that you speak to an accountant or specialist tax advisor if you believe the new reverse charge VAT rules apply to your business and you have any questions about what you need to do.

Speak to an accounting expert

If you're unsure what level of support you need, our friendly team are on hand to help you pick the right package for you.
team photo off all crunch team
Share this post
Ross Bramble
Content Executive
Updated on
August 23, 2022

Knowledge Hubs

Speak to the experts

Our UK based team of experts are ready to help you find the best accounting package for you and your business.

icon of a green tick
Certified Accountants
icon of a green tick
HMRC Approved
Patrick,
Senior Sales Advisor
Book a meeting
Crunch Pro Tip
Speak to an accounting expert

If you're unsure what level of support you need, our friendly team are on hand to help you pick the right package for you.

Crunch Pro Tip
Using cloud-based accountancy software to manage your finances gives any small business a big advantage!

At Crunch we provide affordable cutting-edge, easy-to-use software with real human support from expert chartered accountants. That’s probably why 81% of our clients would recommend Crunch.

Crunch Pro Tip
Did you know - you have access to a Chartered Certified accountant for free on our paid subscriptions?

Book a call with our one accountants and get your questions answered. Just £24.50 +VAT for Crunch Free users.

Crunch Pro Tip
Did you know - Your Self Assessment has to be filed by the 31st of January deadline?

Crunch’s Self Assessment service provides an expert accountant to complete, check, and file your Self Assessment for you for just £140 +VAT.

Crunch Pro Tip
Did you know - We have a free plan that is great for sole traders and limited companies?

Why not see for yourself? It’s simple and easy to use and 100% free.