VAT Construction Reverse Charge: CIS Implications

What Is the Construction Reverse Charge?

Since 1 March 2021, the domestic reverse charge for building and construction services applies in the UK. Under this rule, the customer (the contractor) accounts for the VAT rather than the supplier (the subcontractor).

This was introduced to combat VAT fraud in the construction industry, where some businesses collected VAT from customers but failed to pay it to HMRC.

Who Does It Affect?

The reverse charge applies when all of the following conditions are met:

1. The supply is of specified construction services (as defined in the CIS regulations)
2. Both the supplier and customer are VAT-registered
3. The customer is registered for CIS (Construction Industry Scheme)
4. The customer is not an end user or intermediary supplier connected to end users
5. The supply is reported within CIS

What Are Specified Construction Services?

These include most construction operations covered by CIS:

• Construction, alteration, repair, extension, demolition
• Installation of heating, lighting, power, drainage, water systems
• Painting, decorating, and cleaning of buildings
• Operations forming part of the land (roads, walls, power lines)

Excluded services include architectural design, surveying, and professional consultancy (unless part of a wider construction supply).

How It Works in Practice

For Subcontractors

When you supply construction services to a CIS-registered contractor (who is not an end user):

• Do not charge VAT on your invoice
• Add a note: "Reverse charge: customer to account for VAT to HMRC"
• Show the applicable VAT rate (usually 20%) so the customer knows what to account for
• Include the net amount only on your invoice

Impact on your VAT return: Your output VAT is lower (because you're not charging VAT on these supplies). This may put you in a regular refund position.

For Contractors

When you receive construction services subject to the reverse charge:

• Account for the VAT that the subcontractor would have charged
• Include it in Box 1 (output VAT) of your VAT return
• If reclaimable, also include it in Box 4 (input VAT)
• The net effect is usually zero

End Users and Intermediary Suppliers

The reverse charge does not apply when the customer is an end user — the final customer in the construction chain who is not going to make further supplies of construction services.

Examples of end users:

• A business having its office refurbished (not a construction company)
• A homeowner having work done (though they're unlikely to be VAT-registered)
• A property developer building homes for sale (the homes are not construction services)

End users receive normal VAT invoices and pay VAT to their suppliers as usual.

If you're a subcontractor, you need to confirm whether your customer is an end user or not. If they are, charge VAT normally. If they're not, apply the reverse charge.

CIS and VAT Interaction

The reverse charge only applies to supplies that are also within CIS. If a payment isn't reported under CIS, the reverse charge doesn't apply.

CIS deductions still apply separately. The CIS deduction (20% or 30% of the labour element) is calculated on the net amount (excluding VAT). Since the subcontractor's invoice under the reverse charge doesn't include VAT, the CIS deduction is straightforward.

Cash Flow Implications

For Subcontractors

The reverse charge can significantly affect cash flow. Previously, a subcontractor invoicing £10,000 plus £2,000 VAT received £12,000 (minus CIS deduction). Now they invoice £10,000 with no VAT element. That's £2,000 less cash received.

The subcontractor's output VAT is also lower, which may mean regular VAT refund claims — but these take time to process.

For Contractors

Cash flow improves slightly — you're not paying VAT to subcontractors upfront. Instead, you account for it through your VAT return.

Record-Keeping

Both parties must keep records showing:

• Whether the reverse charge was applied
• The end user status of the customer
• The value of the supply and the applicable VAT rate
• CIS deduction calculations

With Accounted, Penny understands both CIS and the construction reverse charge, ensuring your invoices and VAT returns are correct.

Navigate construction VAT with confidence. Start your free trial with Accounted and let Penny handle CIS and reverse charge calculations.