Reverse Charge VAT in Construction: What Contractors Must Do

Understanding the Domestic Reverse Charge

The VAT domestic reverse charge for construction services was introduced to combat fraud in the sector. This comprehensive guide explains how the rules work, which services are affected, and the steps contractors must take to remain compliant.

1. When the Reverse Charge Applies

The reverse charge affects supplies of construction services between VAT-registered businesses where:

• The services are standard or reduced-rated
• The customer is registered for VAT in the UK
• Payment is required under the Construction Industry Scheme (CIS)
• Both parties are not connected or part of the same corporate group

It applies to most construction operations including building, civil engineering, and installation of systems.

2. Services Excluded from Reverse Charge

The reverse charge does not apply to:

• Zero-rated supplies
• Supplies to end users (property owners, tenants)
• Supplies to intermediaries connected to end users
• Certain specified materials
• Professional services like architects or surveyors

3. How Reverse Charge Works

Under the reverse charge mechanism:

1. The supplier does not charge VAT on their invoice
2. The customer accounts for the VAT due on their VAT return
3. The customer can reclaim the VAT (if eligible) in the same period
4. No net VAT payment is usually made to HMRC

This removes the opportunity for suppliers to collect VAT but not pay it to HMRC.

4. Invoicing Requirements

Invoices must include specific wording:

• "Reverse charge: VAT Act 1994 Section 55A applies"
• The rate and amount of VAT due under reverse charge
• Statement that the customer must account for the VAT

Failure to include these details may result in penalties.

5. Practical Steps for Compliance

Contractors should:

1. Update accounting systems to handle reverse charge transactions
2. Train staff to identify reverse charge scenarios
3. Modify contract terms and invoicing templates
4. Verify customer VAT and CIS status before supplying services
5. Implement processes to track reverse charge supplies
6. Consider impact on cash flow (no VAT collected upfront)

6. Common Pitfalls to Avoid

Key mistakes include:

• Applying reverse charge to excluded services
• Failing to update invoicing systems
• Not verifying customer status
• Incorrect VAT return entries
• Missing the CIS connection