If you do CIS construction work for another VAT-registered builder, you usually do not charge them VAT. You move it to them instead, using the VAT domestic reverse charge. The catch is your invoice has to say so, in the right way, or your customer cannot work out what to pay HMRC.
This guide shows you exactly what a reverse charge invoice has to say, the wording HMRC accepts, how to show the VAT without charging it, and a full worked example you can copy.
It is written for subcontractors and contractors in the building trades who are both VAT and CIS registered. If you want your invoicing and VAT returns handled properly, that is what we do at Zmartly for construction businesses.
When does the reverse charge apply to your invoice?
The VAT domestic reverse charge applies when all of these are true at once:
- The supply is a construction service (or construction service plus materials) that is reported under the Construction Industry Scheme (CIS).
- The supply is standard-rated (20%) or reduced-rated (5%) for VAT. Zero-rated work, such as building a new home, is outside the reverse charge.
- Both you and your customer are VAT registered.
- Both you and your customer are registered for CIS.
- Your customer is not an "end user" or an "intermediary supplier" (more on this below).
If all five hold, you do not charge VAT on the invoice. Your customer accounts for it instead. If any one of them fails, you invoice VAT the normal way.
The reverse charge covers the construction operations you would already report under CIS: construction, alteration, repair, demolition, installation of heating, lighting, power and water systems, painting and decorating, and the preparatory work that goes with them. Some services are excluded when supplied on their own, including professional work by architects and surveyors, and installing seating, blinds or security systems.
What does HMRC require on a reverse charge invoice?
Your invoice still has to carry all the usual VAT invoice details (your VAT number, the date, a description of the work, and so on). On top of that, HMRC says a reverse charge invoice must do two specific things.
First, it must make clear that the domestic reverse charge applies and that the customer is the one who has to account for the VAT.
Second, it must show how much VAT is due under the reverse charge, or, if you cannot show the amount, state the rate of VAT. The crucial part is that you do not add that VAT to the total the customer pays you. You show it for information only, so your customer knows what to declare to HMRC.
So a reverse charge invoice has a VAT line that reads as a note, not a charge. The customer pays you the net amount. The VAT travels to HMRC through their VAT return, not yours.
What is the exact wording HMRC accepts?
The law requires your invoice to include a clear reference to the "reverse charge". HMRC's technical guidance lists wording that meets the requirement. Any of the following is acceptable:
- Reverse charge: VAT Act 1994 Section 55A applies
- Reverse charge: S55A VATA 94 applies
- Reverse charge: Customer to pay the VAT to HMRC
If your accounting software cannot show the VAT amount on a reverse charge line, HMRC also accepts wording along the lines of "reverse charge: customer to account to HMRC", as long as your customer can still identify which goods or services the reverse charge applies to.
The key ingredients are the words "reverse charge" plus a clear statement that the customer accounts for the VAT. Pick one form and use it consistently. We tend to put the line directly under the VAT summary so it cannot be missed.
How do you show the VAT amount without charging it?
This is the part that confuses people. You show the VAT, but you do not collect it.
On the invoice, list your net charge as normal. Then show the VAT that would have applied (at 20% or 5%) as a separate note, clearly flagged as reverse charge VAT. The invoice total your customer pays is the net figure only, with no VAT added.
On your own VAT return, you do not enter any output tax on that sale. You only include the net value of the sale. Your customer does the opposite: they add the reverse charge VAT to their output tax, and (where they can recover it) reclaim the same amount as input tax, so it usually nets to nil for them in cash terms.
There is a useful tidy-up rule for mixed invoices. If a supply is partly reverse charge and partly normal, and the reverse charge part is 5% or less of the whole, that small element can be disregarded so the normal rules apply to the lot, but only where you and your customer agree this from the start of the contract. Otherwise, if any part of a single supply falls under the reverse charge, treat the whole supply as reverse charge.
What is an end user, and why does it change the invoice?
An "end user" is a VAT and CIS registered customer who receives the construction service but does not sell it on as a construction service, a property developer building to let or occupy, for example. An "intermediary supplier" is a business connected or linked to an end user (such as a landlord and its property-owning group company).
The reverse charge does not apply to supplies to end users or intermediary suppliers. For those customers you invoice VAT the normal way.
The catch is that you cannot always tell from the outside. So the rule is that the customer must tell you, in writing, if they are an end user or intermediary supplier. That confirmation can be in a contract, an email or a letter. If they have not told you, and the other conditions are met, you apply the reverse charge. Keep that written confirmation on file, because it is your evidence for charging VAT normally.
Illustrative example: a reverse charge invoice for a subcontractor
Illustrative example. Imagine Jay runs a groundworks firm as a limited company, registered for VAT and CIS. He invoices a main contractor, also VAT and CIS registered, for a month of standard-rated site work worth 4,000 net. The main contractor has not said it is an end user, so the reverse charge applies.
Jay's invoice shows:
| Line | Amount |
|---|---|
| Groundworks, standard-rated construction services | £4,000.00 |
| VAT at 20% (reverse charge, not charged) | £800.00 |
| Reverse charge: Customer to pay the VAT to HMRC | |
| Total payable by customer | £4,000.00 |
The main contractor pays Jay £4,000. It does not pay him the £800 of VAT.
On his VAT return, Jay enters £4,000 of net sales and £0 of output VAT on this invoice. The main contractor enters £800 as output VAT on its return, and reclaims £800 as input VAT (assuming full recovery), so the £800 nets to nil in cash for the contractor and reaches HMRC correctly.
Separately, because this is a CIS payment, the contractor still applies any CIS deduction to the labour element of the £4,000. For a registered subcontractor that is 20% (it would be 30% if Jay were not CIS registered, or 0% if he held gross payment status). CIS and the VAT reverse charge run side by side on the same payment, but they are different rules: CIS is a deduction from what the contractor pays Jay, the reverse charge moves the VAT accounting to the contractor.
These figures are illustrative. Your own invoice depends on the rate of VAT, the value of the work, and your CIS position.
Getting the reverse charge, your VAT return and your CIS deductions to line up on every job is fiddly, and a wrongly worded invoice can leave your customer unsure what to pay HMRC. That is the sort of thing our VAT services for UK businesses are built to take off your plate.
Want your construction invoices and VAT returns set up so the reverse charge is right every time? Book a free call with a Zmartly accountant and we will review how you invoice.
Frequently asked questions
What wording must a construction reverse charge invoice use?
It must include a clear reference to the reverse charge and state that the customer accounts for the VAT. HMRC accepts wording such as "Reverse charge: VAT Act 1994 Section 55A applies", "Reverse charge: S55A VATA 94 applies", or "Reverse charge: Customer to pay the VAT to HMRC".
Do I show the VAT amount on a reverse charge invoice?
Yes, but you do not charge it. Show how much VAT is due under the reverse charge (or, if you cannot show the amount, state the VAT rate), and do not add that VAT to the total the customer pays. The customer accounts for that VAT on their own return.
Does the reverse charge apply if my customer is the end user?
No. The reverse charge does not apply to supplies to an end user or an intermediary supplier, and you invoice VAT the normal way. But the customer must tell you in writing that they are an end user or intermediary supplier. Keep that confirmation on file.
Do I still make CIS deductions if the reverse charge applies?
Yes. CIS and the VAT reverse charge are separate. You still apply the CIS deduction to the labour element (20% for a registered subcontractor, 30% if unregistered, 0% with gross payment status). The reverse charge only changes who accounts for the VAT.
How do I record a reverse charge sale on my VAT return?
As the supplier, you enter the net value of the sale and no output VAT. You do not collect the VAT. The customer adds the VAT to their output tax and, where they can recover it, reclaims it as input tax on the same return.
