Reverse charge VAT: who accounts for the tax

The domestic reverse charge for building and construction services has applied since 1 March 2021. It changes who hands the VAT to HMRC. It does not change how much VAT there is, and it does not change the value of the work.

Under the normal rule, the supplier charges VAT on the invoice, collects it from the customer, and pays it to HMRC. Under the reverse charge, the supplier charges no VAT. The customer accounts for it: it declares the output tax it would have been charged and, in the same return, reclaims the input tax it is entitled to. For a fully taxable business the two cancel and no cash moves for the VAT at all.

When the reverse charge applies

Three things have to be true at once. The supply is a construction service within the scope of the Construction Industry Scheme. Both parties are registered for VAT. And the customer is not an end user.

It applies to supplies at the standard rate and the reduced rate. It does not apply to zero-rated supplies, because there is no VAT to reverse.

The end user carve-out

An end user is a business that receives the construction service but does not supply construction services on to anyone else. A client or a developer taking the finished building for its own purposes is the obvious case. For an end user the reverse charge does not apply, and the supplier charges VAT in the normal way.

The point of the carve-out is that the reverse charge is a chain measure. It moves VAT accounting up the supply chain between businesses that are all making onward construction supplies. At the top of the chain, where the work stops being passed on, the chain ends and normal VAT resumes.

What the invoice has to say

Where the reverse charge applies, the supplier does not add VAT to the invoice total. Instead the invoice states that the reverse charge applies and that the customer is the one to account for the VAT. The amount that changes hands is the value of the work, with no VAT on top.

So on the application and on the certificate, the sum caught by the reverse charge is a net sum. There is no VAT line adding to what the customer pays. The customer settles the VAT with HMRC through its own return, not through the payment to the supplier.

Why this trips up a valuation

A quantity surveyor is used to a valuation that carries VAT on top of the certified figure. When the reverse charge applies, that habit produces a payment that is too high by the VAT, because the customer is paying VAT to the supplier that the supplier should never have charged and that the customer is separately accounting for to HMRC.

The mirror error is a supplier who does not realise it is inside the reverse charge, charges VAT, and then finds the customer has quite correctly declined to pay it. Either way the confusion sits in the gap between what the application shows and what the payment is.

The check before the certificate goes out

• Is the service within the scope of CIS?
• Are both parties registered for VAT?
• Is the customer an end user, or is it passing the construction on?
• If the reverse charge applies, does the certificate show the work net of VAT, with the reverse charge stated rather than a VAT line added?

If the answer to the first three is yes, yes, and not an end user, then no VAT goes on the payment. The customer accounts for it. Show the figure net, say the reverse charge applies, and the payment that lands will match the certificate.