Domestic Reverse Charge – Supplies of Building and Construction Services FAQ

Our question  and answer guide to help you get started

The implementation date for the VAT domestic reverse charge for construction services is 1 March 2021.  With this in mind, we have addressed some of the most common queries arising:

Q. How do I decide whether to use the reverse charge?

A. Firstly find out if your customer is registered for the Construction Industry Scheme and registered for VAT. Then decide whether your customer is an end-user or a business that will receive your services, and supply them along with other building and construction services to another party. If your customer will supply your work to another party in this way and the work is subject to VAT, then you need to operate the reverse charge. HMRC have stated that if you have any doubts over the correct VAT treatment, then provided the recipient is VAT registered and the payments are subject to the CIS, it recommends that the reverse charge is applied.

Q. If I am not sure whether my customer is an end-user, what should I do?

A. The onus is on the customer to notify you that they qualify to be treated as an end-user in relation to the supply. You could ask them to provide you with a written statement such as: “We are an end-user [or intermediary supplier] for the purposes of section 55A VAT Act 1994, reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.”

Q. My customer says they are an intermediary supplier and I don’t need to operate the reverse charge. What does this mean?

A. An intermediary supplier is a business that is registered for VAT and the CIS and is linked or connected to an end-user. They must either have a relevant interest in the same land where the construction works are taking place, or be part of the same corporation tax group as the end-user. You can ask them to supply you with a written statement confirming their status (see question above about end-users).

Q. How do I find out if my customer is registered for CIS and VAT?

A. If it is a new customer, ask them for their CIS registration number or a copy of their registration certificate. You should keep this as part of your VAT records. There is an online VAT number checker service which allows you to check if a VAT number you have been given is valid, and also the name and address of the business that has that VAT registration.

Q. I am currently undertaking some work which will fall within the reverse charge rules in March. What rules will apply if I haven’t finished the work before then?

A. For anything invoiced with a tax point before 1 March 2021, normal VAT rules will apply and VAT should be charged at the appropriate rate. For anything invoiced with tax point on or after 1 March 2021, the domestic reverse charge will apply.

Q. I use cash accounting and have heard that this may be a problem with the reverse charge

A. You cannot use cash accounting for supplies covered by the reverse charge, but if you wish, you can continue to use it for other supplies.  If your supplies are mostly covered by the reverse charge, you may benefit from moving onto normal VAT accounting because VAT can then be recovered on purchase invoices when they are entered in the books rather than when the supplier is paid.  If you find that under the reverse charge you are regularly qualifying for repayment, you may benefit from asking to submit monthly VAT returns to speed up the repayment of input tax from HMRC.

Q. I’ve just completed some plastering work for Main Contractor Ltd which is overseeing the development of an office block. How should I invoice this?

A. If Main Contractor Limited is CIS and VAT registered, you should issue an invoice to them showing all the normal information, but also including a narrative such as “Reverse charge - customer to pay VAT to HMRC”. The amount of VAT due under the reverse charge rules should be stated on the invoice but not included in the amount shown as VAT charged. If your business generates its invoices electronically and the amount of VAT that needs to be paid cannot be shown on the invoice, then you must include wording on the invoice stating that the customer is required to calculate the standard rate of VAT due on the amount shown on the invoice. You could use the following wording: “Customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of the items marked reverse charge.”

Q. What if I have done two pieces of work for the same customer: one where they were the end-user and one where they were selling the work on as part of a larger supply of construction services?

A. Usually, if you raise an invoice that includes both reverse charge and non-reverse charge work, the reverse charge will apply to the whole invoice. However, if the reverse charge element of the work is 5% of the amount invoiced or less than 5%, then the normal VAT rules can be applied to the whole invoice.

Q. What entries should I make on my VAT return for supplies I have made under the reverse charge?

A. For supplies liable to the reverse charge, you should enter the net amount charged on the invoice in box 6 of your VAT return. No amount should be entered into box 1 for the reverse charge supplies. Don’t forget however that VAT must still be charged on all supplies that are not liable to the reverse charge in the normal way and included on the VAT return.

Q. I have a UK registered business and have received an invoice relating to a domestic reverse charge supply. What VAT should I pay?

A. You will need to self-account for the amount of the reverse charge VAT shown on the invoice. If the invoice states that it is a reverse charge invoice but does not show the amount of VAT due on the specified supplies, you must calculate the amount due using the appropriate VAT rate.

Q. How do I show the reverse charge VAT I need to pay on my VAT return?

A. The amount of VAT due should be included in box 1 on your VAT return covering the period in which the supply was received. Normal tax point rules apply for determining when the supply is made or received. The net amount should be included in box 7 on the same VAT return and no amount should be included in box 6 in respect of the reverse charge supplies. If you are entitled to recover all of the VAT incurred as input tax, then the same amount should be included in box 4 of the same VAT return.

Q. So now I know what I want to invoice and report, how do I get my accounting software to do it?

A. Here is the link to guidance relating to the reverse charge in Xero. Only their MTD for VAT software supports the reverse charge, so if you are not already using this, you will need to set it up or speak to your bookkeeper or accountant. We understand that Quickbooks intend to have some guidance in place for 1 March, but it is not yet available.