VAT reverse charge technical guide

1. End users and Intermediary supplier businesses

End users

For reverse charge purposes consumers and final customers are called end users. They’re businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them.

The reverse charge does not apply to supplies to end users where the end user tells their supplier or building contractor in writing that they’re an end user.

Intermediary suppliers

Intermediary suppliers are VAT and Construction Industry Scheme registered businesses that are connected or linked to end users. If intermediary suppliers buy construction services and re-supply them to a connected or linked end user, without making material alterations to the supplies, they’re all treated as if they’re end users and the reverse charge does not apply.

To be connected or linked to an end user, intermediary suppliers must either:

• have a relevant interest in the same land where the construction works are taking place, for example, landlord and tenant
• be part of the same corporate group or undertaking as defined in section 1161 of the Companies Act 2006

The reverse charge does not apply to supplies to intermediary suppliers where the intermediary supplier notifies their supplier or building contractor in writing that they’re intermediary suppliers. Intermediary suppliers can refer to themselves as end users.

Design and build companies as intermediary suppliers

Under a design and build contract, the design and build company will buy in building and construction services from multiple suppliers and will provide them as a single supply to the client of a designed and built building.

If the necessary conditions to be an intermediary supplier are met, for the purpose of the reverse charge, the design and build company is not treated as carrying out material alteration or processing of the services it buys in and so can be treated as an intermediary supplier of building and construction services. This also includes supplies such as scaffolding which are integral to the design and build but are not supplied on.

A design and build company can be a connected party or linked to an end user and therefore, normal VAT rules would apply to supplies bought in.

If the design and build company is not a connected party of or linked to an end user, it will not be regarded as an intermediary supplier. Therefore, the reverse charge will apply to construction services bought in for onward supply.

Written notification

Notification of end user or intermediary status can be made:

• on paper and sent by post
• electronically in an email
• in a contract

The notification should be kept as part of normal business records and show clearly what supplies are covered. Contracts can be either for specific supplies or it can be a Heads of Agreement or call-off type contract for supplies that are to be made at some time in the future.

Where the end user or intermediary supplier notification is in a contract issued by the supplier, this will be a valid notification as long as the customer has given written agreement to the contract.

Once written notification has been given there is no need to re-issue it if the customer changes from an:

• end user to an intermediary supplier
• intermediary supplier to an end user

If a written notification is not made correctly the customer will be liable for accounting for the VAT that should have been charged under the reverse charge. It’s important that the person making the notification knows and understands that it’s correct.

An example of the wording to use is:

‘We are an end user 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.’

For the reverse charge not to apply, as well as qualifying as an end user or intermediary supplier, the customer must also make sure they issue a written notification of this to their supplier or contractor. If a customer has not given written confirmation of their end user or intermediary supplier status, the supplier must assume that the reverse charge applies and will not charge VAT to the customer.

2. When to check if your customer is VAT and Construction Industry Scheme registered or an end user

Where sales operations or networks are clearly set for domestic consumer sales it’s not necessary to check the VAT, CIS or end user status of the customer and the normal VAT rules should apply.

If there is any doubt you should always ask the customer whether they’re registered for VAT and CIS and whether or not they’re an end user.

If you often deal with end users or intermediary suppliers, you can include a statement in your terms and conditions to say you’ll assume that your customer is an end user or intermediary supplier unless they say they’re not. This places a responsibility on the customer to respond if this is not the case.

3. Employment businesses supplying construction workers

Employment businesses are treated differently for the purpose of the reverse charge. Supplies by employment businesses are not subject to the reverse charge, even if those supplies are within the scope of CIS.

Employment businesses supplying construction workers are, for VAT purposes, treated as supplying staff rather than building and construction services.

For VAT purposes, such activities of workers are supplies of staff by their employer and not supplies by the workers themselves. The supplier makes a supply of staff for VAT purposes if it provides another person with the use of an individual who is:

• contractually employed or otherwise engaged by the employment business
• a director of the employment business

A similar situation arises with joint ventures, the construction firms that are parties to the joint venture provide workers on secondment to work on the joint venture project. Payments by the joint venture to each construction firm for their staff is not payment for construction services and therefore not subject to the reverse charge.

4. Labour only sub-contractors

The reverse charge applies to services provided by labour only sub-contractors. The labour only sub-contractor is responsible for the works carried out and therefore subject to the reverse charge. This applies if the services provided are:

• standard rated
• reduced rated
• within the scope of CIS

A supply of labour only construction services is subject to the reverse charge whereas a supply of staff is not. The simplest way to tell the difference for a supply of:

• labour only construction services – the business supplying the labour will be responsible for overseeing the completion of the work carried out by the workers
• staff – the customer that receives the workers will be responsible for overseeing the completion of the work carried out

Distinction between employment businesses and labour-only sub-contractors

Supplies by labour only sub-contractors are subject to the reverse charge if the supplies are within the scope of Construction Industry Scheme and all the other conditions are met.

The supplies made by the employment business are not subject to the reverse charge even if those supplies are within the scope of Construction Industry Scheme.

The supplying business should be treated as an employment business if these features apply:

• the customer contacts the employment business and asks for X workers for Y days
• the workers are employed by or engaged by the employment business
• the employment business provides an hourly or daily rate for the workers
• a timesheet is used to record the hours and days worked
• the customer sends the signed timesheet agreeing the hours and days worked to the employment business
• the customer pays the employment business
• the customer’s site foreman or managers direct and control the works carried out by the workers
• the customer is responsible for the works carried out

The supplying business should be treated as a labour only sub-contractor if these features apply the:

• customer contacts a business and asks for a skilled labourer (for example, a bricklayer, electrician or plumber) to carry out specified services
• labourers are employed by or engaged by the business
• business provides a price for the works or agrees a measured rate per square metre
• supplying business is responsible for the labourer’s works
• supplying business is responsible for correcting any defects following completion of the works
• customer, or its representatives, agrees that the work has been carried out or certifies payment for the value of works carried out to date

The reverse charge applies to the services supplied by the business (if those services are within the scope of CIS) and VAT should not be charged on the invoices.

5. How the domestic reverse charge will affect you

HMRC understands that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.

Any errors should be corrected as soon as possible, as the longer under declared or overcharged sums remain outstanding the more difficult it may be to correct or recover them.

HMRC officers may assess for errors during the light touch period, but penalties will only be considered if you are deliberately taking advantage of the measure by not accounting for it correctly.

6. Changes to cash flow and monthly returns

The reverse charge may also mean your business will make net repayment claims to HMRC, as you no longer receive VAT on your sales.

You can apply to move to monthly returns using your online VAT account.

If you are a sub-contractor you should also be aware that your customers will no longer be paying you VAT, which will reduce the gross value of payments coming into your business. So you’ll need to consider and plan for the impact of this on your day-to-day cashflow.

7. Services with reverse charge and normal VAT charging

Supplies where the reverse charge element is a minor part

Normally if any of the services in a supply are subject to the reverse charge, all other services supplied will also be subject to it. However, if the reverse charge part of the supply is 5% or less of the value of the whole supply this can be disregarded (this is referred to the ‘5% disregard’) and normal VAT rules will apply if the customer makes an end user or intermediary supplier notification.

Supply and fix works will be subject to the reverse charge because the services and goods are part of one supply for VAT purposes. For example, a joiner constructing a staircase offsite then installing it onsite, will be making a reverse charge service even if the charge for installation is only a small (subject to the 5% disregard) element of the overall charge.

In addition, if 2 parties have already had a reverse charge service between them on a construction site, for convenience they can both agree that any subsequent construction supplies on that site can be treated as reverse charge services.

If there is doubt whether a type of work falls within the definition of building and construction services, as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply. You should also check the list of specified services.

Separate contracts for labour and materials

If a customer enters into 2 separate contracts with the same supplier for works within the scope of CIS and the works are to be provided at the same time on the same site, the reverse charge will apply to both contracts (subject to the 5% disregard) as they comprise a single supply for VAT purposes.

Splitting of invoices for supply and fix orders

If a customer places a single supply and fix order within the scope of the CIS with a supplier, the reverse charge will apply to the full value of the order even if the supplier issues separate invoices for the supply and fix elements.

If a customer places 2 separate orders with the same supplier for supply and fix works within the scope of CIS (for example, one order for materials and a second order for labour) and the works are to be provided at the same time and on the same site, the reverse charge will apply to both orders (subject to the 5% disregard) as they comprise a single supply for VAT purposes.

Supply of spares after completion of a supply and fix contract

When a supply and fix contract is completed, and the customer orders spares:

• if the original contract did not provide for the supply of spares this is a materials-only supply outside the scope of CIS – therefore, normal VAT rules apply and VAT should be charged by the supplier on the sale of spares
• if the original contract provided for the supply of spares and the original contract is subject to the reverse charge the supply of spares will also be subject to the reverse charge and VAT should not be charged by the supplier on the sale of spares – if the original contract was to an end user the reverse charge will not apply

8. Change of VAT treatment during a contract

There may be contracts where a change in customer circumstances means the VAT treatment changes from the reverse charge to the normal VAT accounting rules or vice-versa.

Where this occurs, the customer must notify the supplier to enable the correct VAT treatment to be applied.

The new treatment will apply at the point the customer’s circumstances changed.

If this change happens during an invoice period (where there would be one invoice including both reverse charge and normal VAT rules), the supplier can decide to change to the new treatment for the entire invoice period or wait until the next invoice period before changing to the new treatment.

9. How to account for the reverse charge

VAT is due when a VAT invoice is issued, or payment is received, whichever is earlier.

For invoices issued for specified supplies that become liable to the reverse charge, the VAT treatment for invoices with a tax point:

• before 1 March 2021 – the normal VAT rules will apply and you should charge VAT at the appropriate rate on your supplies
• on or after 1 March 2021 – the domestic reverse charge will apply

Transitional supplies for authenticated tax receipts or self-billed invoices

For authenticated tax receipts or self-billed invoices the tax point is normally the date the supplier receives payment.

The transitional arrangements for how to determine the VAT treatment for payments due on any supplies entered into your accounting system is if the date entered is:

• before 1 March 2021 and the payment date will be on or before 31 May 2021, use the normal VAT rules
• before 1 March 2021 and the payment date will be on or after 1 June 2021, use the domestic reverse charge
• on or after 1 March 2021, you must use the domestic reverse charge

10. Completing your VAT return

VAT on sales

Suppliers must not enter any output tax on sales under the reverse charge. The supplier only needs to enter the net value of the sale.

VAT on purchases

If you buy services subject to the reverse charge, you must enter the VAT charged as output tax on your VAT return. Make sure you do not enter the net value of the purchase as a net sale.

You may reclaim the input tax on your reverse charge purchases, subject to the normal VAT rules.

11. Cash accounting scheme

You cannot use the VAT Cash Accounting Scheme for supplies of services that are subject to the reverse charge.

12. Accounting for payments made or received

Some businesses in the construction sector prefer to account for their VAT on the basis of payments made and received. The reverse charge will bring in the following changes.

Sales

For sales, no VAT will be due on payments from customers where the supply is covered by the reverse charge.

All you need to do is include the value of the sale in your VAT Return when you receive the payment.

If you supply services that are not subject to the reverse charge, for example to private individuals or end users, you must account for VAT on the dates you were paid.

Purchases

If you receive a service subject to the reverse charge from sub-contractors you’ll have to account for the VAT in your VAT Return and recover it simultaneously on the same VAT Return, subject to the normal rules on VAT input tax deduction.

You can account for this on the date you make the payment to your sub-contractor, unless they have issued you with a tax invoice beforehand, in which case you should account for the VAT using the date of the invoice.

13. Flat rate scheme

Reverse charge supplies are not to be accounted for under the scheme. Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC and recover it simultaneously on the same VAT Return.

Users of the Flat Rate Scheme will have to consider if it’s still beneficial to them bearing in mind that under the scheme they cannot recover VAT incurred on purchases of materials, overheads and so on.

14. Invoices and other VAT documents

Invoices

When supplying a service subject to the domestic reverse charge, suppliers must:

• show all the information required on a VAT invoice
• make a note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT
• clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but the VAT should not be included in the amount charged to the customer

The VAT regulations 1995 say invoices for services subject to the reverse charge must include the reference ‘reverse charge’. Here are some examples of wording that meet the legal requirement:

• reverse charge: VAT Act 1994 Section 55A applies
• reverse charge: S55A VATA 94 applies
• reverse charge: Customer to pay the VAT to HMRC

Invoice example (PDF, 98.2 KB, 1 page)

If your accounting software cannot show the reverse charge

If your software cannot show the amount of VAT to account for under reverse charge, you must:

• state that the VAT is to be accounted by the customer
• add wording to the invoice to say ‘customer to account to HMRC’ for the reverse charge
• make sure customer can identify reverse charge goods or services

15. Credit notes and adjustments

Adjustments in the course of business

If a supplier allows a credit to a customer who can reclaim all the tax on their supply as input tax, you do not have to adjust the original VAT charge as long as both the supplier and customer agree not to do so. If these conditions are met this concession can also apply to reverse charge supplies.

Otherwise, the following adjustments will need to be made:

Suppliers

Issue a credit note to the customer with a note on it to show that the reverse charge applies and showing the reduction in the VAT the customer has to pay to HMRC.

Here are some examples of wording you can use for credit notes:

• reverse charge: customer to account for the output tax adjustment of £X to HMRC
• reverse charge: UK customer to account for the output tax adjustment of £X to HMRC
• customer to account to HMRC for the adjustment to reverse charge output tax on the VAT exclusive price of items marked reverse charge (use this if the VAT amount cannot be shown)

Include the reduction in the value of the supply on the VAT Return for the period in which the credit note is issued.

Customers

Adjust the amount of output VAT due (as shown on the supplier’s credit note) by reducing the total VAT due in the VAT Return for the period in which the credit note was issued.

Adjust the amount of input VAT in the same VAT Return, in accordance with any input tax adjustment calculations that apply (for example partial exemption methods).

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