Since the introduction of Reverse Charge VAT for the construction industry in March 2021, businesses have had to adjust to a new way of accounting for VAT. While it has helped reduce VAT fraud, it has also caused confusion. This guide simplifies the rules and provides practical examples to help you get it right.

What Is Reverse Charge VAT?

Under normal VAT rules, a supplier charges VAT to their customer and then pays it to HMRC. The customer, if VAT-registered, reclaims the VAT on their return.

However, under the Reverse Charge VAT, the supplier does not charge VAT. Instead, the customer accounts for both output VAT and input VAT on their VAT return.

💡 Why was it introduced?
To prevent VAT fraud, particularly cases where contractors charged VAT but never paid it to HMRC.

How Does It Work?

Here are three realistic examples to show how the reverse charge applies in practice.

Example 1: Subcontractor to Main Contractor

📍 Scenario:

• Jake’s Electrical Services Ltd (subcontractor) is VAT-registered and does electrical work for Metro Builders Ltd (main contractor).
• The job costs £8,000.

📜 Invoice issued by Jake’s Electrical Services Ltd:
✅ £8,000 (net amount)
❌ NO VAT charged
📌 Invoice Note: “Reverse charge applies — Customer must account for VAT”

📝 How Metro Builders Ltd reports this on their VAT return:
✔️ Box 1 (Output VAT) — £1,600 (20% VAT on £8,000)
✔️ Box 4 (Input VAT) — £1,600 (Reclaiming VAT as an expense)
✔️ Box 7 (Total purchase) — £8,000

💡 Key takeaway:
Jake’s Electrical Services Ltd does not charge or pay VAT, while Metro Builders Ltd accounts for and reclaims it on their VAT return.

Example 2: When the Reverse Charge Does NOT Apply

📍 Scenario:

• Lucas Ltd is a property developer and hires Skyline Roofing Ltd to install a new roof on their own office (not for resale).
• Skyline Roofing Ltd normally applies reverse charge VAT, but Lucas Ltd is an end user.

📜 Invoice issued by Skyline Roofing Ltd:
✅ £12,000 (net amount)
✅ £2,400 VAT (20%) added
📌 Invoice Note: “VAT charged as per normal rules — Customer is an end user”

📝 How Lucas Ltd reports this on their VAT return:
✔️ Box 4 (Input VAT) — £2,400 (VAT reclaim)
✔️ Box 7 (Total purchase) — £12,000

💡 Key takeaway:
Since Lucas Ltd is not selling on the construction services, they must notify the supplier and VAT is charged normally.

Example 3: Mistake — Incorrect VAT Treatment

📍 Scenario:

• Swift Builders Ltd provides plastering services to Greenwood Interiors Ltd.
• The contract includes both labour and materials.
• Swift Builders Ltd thinks it can separate invoices to charge VAT on materials and use reverse charge for labour.

🚨 This is incorrect!

📜 Correct Invoice issued by Swift Builders Ltd:
✅ £6,000 (labour)
✅ £4,000 (materials)
❌ NO VAT charged (because the contract is for both)
📌 Invoice Note: “Reverse charge applies to total amount — Customer must account for VAT”

📝 How Greenwood Interiors Ltd reports this on their VAT return:
✔️ Box 1 (Output VAT) — £2,000 (20% VAT on £10,000 total)
✔️ Box 4 (Input VAT) — £2,000 (Reclaiming VAT as an expense)
✔️ Box 7 (Total purchase) — £10,000

💡 Key takeaway:
The reverse charge applies to the entire contract if it includes both labour and materials. Separating invoices does not change this rule.

When Does the Reverse Charge Apply?

✔️ YES, reverse charge applies if:

• The buyer and supplier are both VAT and CIS registered.
• The work falls within CIS construction services.
• The supply is standard (20%) or reduced (5%) rated for VAT.

❌ NO, reverse charge does NOT apply if:

• The customer is an “end user” (not reselling the service).
• The service is zero-rated or exempt.
• The supplier is not VAT-registered.
• The customer hires workers through an employment business.

Checklist for Contractors and Subcontractors

✅ For Suppliers (Subcontractors):
✔️ Confirm if the customer is VAT and CIS registered.
✔️ Do NOT charge VAT if the reverse charge applies.
✔️ State the reverse charge on the invoice.

✅ For Buyers (Main Contractors):
✔️ Check if the reverse charge applies before paying.
✔️ Account for VAT correctly in Box 1 and Box 4 of the VAT return.
✔️ Notify suppliers if you are an end user.

Final Thoughts

The Reverse Charge VAT rules can feel complicated at first, but by following clear steps and using practical examples, businesses can stay compliant and avoid mistakes.

💡 Key takeaways from this guide:

• Always check if reverse charge applies before invoicing.
• If a contract includes both labour and materials, the entire supply falls under reverse charge.
• End users must inform their supplier to be charged VAT normally.
• Reverse charge VAT does NOT change the final VAT cost, but it affects cash flow.

📌 Need further help?
Talk to us at ts.tax to ensure you are applying the rules correctly.