Does the VAT reverse charge apply to this job? Five questions for a subcontractor, and what it does to the money you receive

If you are a VAT-registered subcontractor working for other builders, some of your invoices have no VAT on them. That is the domestic reverse charge for building and construction services, in force since March 2021. The contractor pays the VAT to HMRC instead of paying it to you. Getting it wrong either way causes trouble: charge VAT when you should not and the contractor cannot reclaim it; leave it off when you should not and you owe it.

Our invoice template covers the wording that goes on the invoice. This guide is about the decision before that, and what it does to your cash.

The five questions

HMRC's technical guide sets the conditions. The reverse charge applies to a supply only if the answer to all five is yes.

1. Are you VAT-registered in the UK? If you are not registered, you do not charge VAT at all and the reverse charge does not come into it.
2. Is your customer VAT-registered in the UK? Check their VAT number before the first invoice.
3. Is the work within the Construction Industry Scheme, and will the payment be reported under CIS? Work outside CIS, such as the professional work of architects or surveyors, is excluded.
4. Is the work standard-rated or reduced-rated? The guide says the reverse charge does not apply to zero-rated work. A new-build house is the common example; our guide to 0% VAT and CIS on a new-build invoice works one through.
5. Has the customer not told you, in writing, that they are an end user or an intermediary?

The last one catches people out. An end user is a business that buys the building work for itself, not to sell it on, such as a landlord having a block refurbished. An intermediary supplier is connected or linked to an end user and passes the work on to them. HMRC says these customers must give written notice, by post, by email or in the contract, and suggests wording such as "We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services." If you have that notice, you charge VAT in the normal way.

The 5% disregard

A job can mix reverse charge work with something that is not, for example a supply that also includes a non-construction item. The technical guide says that if the reverse charge part is 5% or less of the whole value, it can be disregarded. Read the rule the right way round: it is the small reverse charge part that can be ignored, not the other way.

One £8,000 job paid both ways

Say you supply £5,000 of labour and £3,000 of materials. You hold CIS registration, so the contractor deducts 20% from the labour only: £1,000.

On paper the job is worth the same to you either way. In your bank account it is not. Under normal VAT you hold the £1,600 until your VAT return is due, which on a quarterly return can be several months. Under the reverse charge it never arrives. If you are used to VAT money covering the gap between paying for materials and filing your return, that cushion has gone on every reverse charge job, while the VAT you pay your suppliers for materials still goes out of your account and is reclaimed on your return.

Some subcontractors whose work is mostly reverse charge end up with HMRC owing them VAT each quarter. Monthly VAT returns can bring that refund in sooner; ask your accountant whether it suits you.

Before the first invoice to a new customer

• Note their VAT number and CIS status from your CIS checklist.
• Ask whether they are an end user or intermediary, and keep any written notice on the job file.
• Decide whether the work is standard, reduced or zero-rated.
• Mark the invoice clearly, for example "Customer to pay the VAT to HMRC".

Overlyft builds AI staff who join a trades office: they check each new customer's VAT and CIS details, ask the end-user question by email, and prepare the invoice with the right VAT treatment for you to approve before it goes.

This is general information, not tax advice. Check HMRC's guidance and your own figures with your accountant.