What is the VAT domestic reverse charge, and does it apply to my job?

It moves the VAT, not the money for the work. Normally you charge £10,000 plus £2,000 VAT, collect £12,000, and pay HMRC £2,000 later. Under the reverse charge you invoice £10,000, collect £10,000, and your customer enters the £2,000 on their own return as both output tax and input tax — usually netting to nothing for them.

HMRC brought it in to kill missing trader fraud, where a subcontractor collected VAT and disappeared before paying it over. The practical effect for honest subcontractors is a permanent hit to cash flow: you no longer hold your customers’ VAT for up to four months before handing it to HMRC. If a large share of your turnover moves to the reverse charge, budget for that gap once rather than discovering it in a quarter.

Under the reverse charge the supplier charges no VAT. The customer accounts for the VAT on their own return.

One upside worth knowing: if the reverse charge pushes you into a permanent VAT repayment position, you can ask HMRC to move you to monthly returns so the repayments come back faster.

All five of these must be true. Work down the list in order.

1. 01The services are within the scope of CIS. Broadly: construction, alteration, repair, extension, demolition, installation of heating, lighting, air conditioning, ventilation, power, drainage, sanitation, water supply or fire protection, plus painting and decorating and site clearance.
2. 02The supply is standard-rated (20%) or reduced-rated (5%). Zero-rated supplies — new-build housing being the big one — are outside the reverse charge entirely.
3. 03Both you and your customer are VAT registered in the UK.
4. 04Your customer is registered for CIS as a contractor.
5. 05Your customer has not notified you that they are an end user or an intermediary supplier.

The reverse charge also catches materials you supply as part of the same construction service. If you fit a boiler, the boiler goes on the reverse charge invoice with the labour. That is the opposite of the CIS deduction rule, where materials come out of the deduction base, and the two get mixed up constantly.

NoteA supply of staff by an employment business is not caught, even if the workers do construction work. Employment businesses charge VAT as normal.

An end user is a business that receives construction services for its own use rather than to sell on as a construction service — typically the building owner, occupier or developer at the top of the chain. An intermediary supplier is a business connected to the end user, or sharing an interest in the same land, that sits in the middle of the chain. Supplies to either are outside the reverse charge, so you charge VAT normally.

The customer must tell you in writing that they are an end user or intermediary supplier. If they do not tell you, the reverse charge applies.

That default is the part firms get wrong. Silence does not mean "charge VAT". Silence means "reverse charge". Get the notification in writing — an email is fine — and keep it with the customer record, not with one invoice. HMRC accepts a standing notification covering all future supplies to that customer, which is what you want.

A reasonable working rule: if you are invoicing a main contractor who is billing their client for the same work, the reverse charge is likely. If you are invoicing a landlord, a housing association, a retailer or a developer for work on their own building, ask for an end user notification.

If the reverse charge element is 5% or less of the value of the whole supply, you can disregard it and treat the entire supply as normal VAT. It exists so that a single small item of construction work inside a much larger non-construction contract does not drag the lot onto the reverse charge.

It works the other way too. If most of a contract is caught, the whole contract goes on the reverse charge rather than being split line by line. HMRC’s guidance is explicit that where there is doubt on a construction contract, and the customer is VAT and CIS registered and happy to account for the VAT, applying the reverse charge is the safer choice.

NoteThe 5% test is applied to the supply, not to your business as a whole.

These are outside the reverse charge when supplied on their own. Supplied as part of a larger construction contract that is caught, they follow the contract.

• Drilling for, or extracting, oil or natural gas
• Extracting minerals, and tunnelling or boring for that purpose
• Manufacturing building or engineering components, materials, plant or machinery, and delivering them to site
• Professional work by architects, surveyors, and consultants in building, engineering, interior or exterior decoration and landscaping
• Making, installing and repairing artworks such as sculptures and murals
• Sign-writing, and erecting and installing signboards and advertisements
• Installing seating, blinds and shutters
• Installing security systems, including burglar alarms, CCTV and public address systems

A reverse charge invoice must show the VAT rate or the VAT amount, must not add that VAT to the total charged, and must state clearly that the reverse charge applies and that the customer is the one who has to account for it. An invoice showing 0.00 VAT with no explanation is not compliant.

HMRC’s suggested wording: "Reverse charge: VAT Act 1994 Section 55A applies. Customer to pay the VAT to HMRC."

Show the rate as well as the notice. Your customer needs to know whether to account for 20% or 5%, and printing "VAT @ 20% (reverse charge) — £0.00" tells them without them having to work it out.

On your VAT return, put the net value of reverse charge sales in box 6 and nothing in box 1. Your customer puts the VAT in box 1, reclaims it in box 4 subject to the normal rules, and puts the net value in box 7 — not box 6.

Reverse charge treatment is a flag on the customer record, not something guessed per invoice. Flag the client once, and every invoice raised for them shows nil VAT with the statutory Section 55A wording — including certified payment applications and retention releases, which are the invoices most often missed. There is one safety check: if your own company has no VAT number on file, the reverse charge is switched off, because there is no VAT to shift if the supplier is not registered.

What Estimark deliberately does not do is decide for you. Whether the supply is within CIS and whether your customer is an end user are determinations only you can make, so they stay a decision you record rather than a guess the software makes. Estimark also does not submit VAT returns and has no Making Tax Digital integration — it stores net, rate and VAT on every invoice and pushes invoices to Xero, QuickBooks, FreshBooks or Sage Business Cloud Accounting, where the return is normally prepared.

More detail on how the reverse charge works in Estimark, including which invoice routes it covers.