Reverse charge
invoice wording

Under the VAT domestic reverse charge for building and construction services, the customer, not the supplier, accounts for the VAT to HMRC. The supplier's invoice has to make that obvious. HMRC's technical guide sets out exactly what it must do, and the wording is short.

Does the reverse charge apply?

It applies when you are VAT registered and supply standard or reduced rated building and construction services, reported under CIS, to a VAT and CIS registered customer who has not told you in writing that it is an end user or intermediary supplier, and you are not an employment business supplying staff. If any of those is missing, you charge VAT normally. The reverse charge checker walks through each condition with the HMRC source.

What the invoice must do

According to HMRC's technical guide, when you supply a service subject to the domestic reverse charge you 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 if this amount cannot be shown, state the rate of VAT, but do not include the VAT in the amount charged to the customer

The VAT regulations say invoices for reverse charge services must include the reference "reverse charge".

Wording HMRC accepts

HMRC gives these examples of wording that meets the legal requirement:

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

Many businesses combine the required reference with a plain-English line, for example: "Reverse charge: customer to pay the VAT to HMRC. VAT at 20% under the reverse charge: £400.00."

A worked example

A plastering subcontractor, VAT and CIS registered, invoices a main contractor for £1,500 of labour and £500 of materials.

The reverse charge covers the materials as well, because goods supplied with construction services are one supply. Separately, the contractor deducts CIS at 20% from the £1,500 labour, £300, and pays £1,700. The CIS calculator shows both figures.

What the customer does

The customer records the VAT shown as output tax on its VAT return and, if entitled, reclaims the same amount as input tax. For most contractors the two cancel out, which is why the reverse charge exists: the VAT never passes between supplier and customer, so it cannot go missing.

If your software cannot show it

HMRC's guide covers this. If your accounting software cannot show the amount of VAT under the reverse charge, you must still show the rate and make the reverse charge note, and keep enough records to support your VAT return. Many invoicing tools now have a reverse charge setting.

Common mistakes

Adding the VAT to the total, so the customer pays it to you. Leaving out the "reverse charge" reference. Applying the reverse charge to a customer who has given you an end user notice. Splitting labour and materials into separate invoices to keep materials outside the reverse charge, which does not work for a single supply and fix order. And applying it when you are not VAT registered, which never applies.

Your own VAT return

As the supplier, you do not enter the reverse charge VAT as output tax, but you do include the net value of the sale in your total sales figure. Keep the customer's VAT and CIS details on file as evidence that the conditions were met.

Normal VAT invoice and reverse charge invoice compared

Cash you receive on a £2,000 net construction invoice

• Normal VAT, before CIS£2,400
• Normal VAT, after 20% CIS£2,100
• Reverse charge, before CIS£2,000
• Reverse charge, after 20% CIS£1,700

Why the reverse charge exists

The reverse charge moves responsibility for the VAT from the supplier to the customer. In construction supply chains, VAT collected by a subcontractor could disappear before it reached HMRC. By having the contractor account for it, the VAT never changes hands, so there is nothing to go missing. For the supplier, the practical effect is that you are paid the net amount and your VAT return shows no output tax on those sales, which can leave you in a repayment position; the guide mentions that some businesses choose monthly VAT returns to get repayments sooner.

Cash flow for the subcontractor

Because you no longer collect VAT on reverse charge sales but still pay VAT on your purchases, many VAT-registered subcontractors find they are due regular VAT repayments. HMRC's technical guide notes you can choose to move to monthly returns to receive repayments faster. Plan for the change: the VAT you used to hold between receiving it and paying it to HMRC is no longer there.

When the customer tells you it is an end user

A customer that is VAT and CIS registered but does not supply the construction services on, such as a business having its own premises refitted, can tell you in writing that it is an end user. Only then do you charge VAT normally. Keep the written notice. If you think a customer is an end user but it has not told you, apply the reverse charge. The reverse charge checker asks this at the right point.

The 5% disregard

If the reverse charge services are 5% or less of the value of a whole contract, and you and the customer agree at the start to apply the disregard, normal VAT rules can apply to the whole supply. It is judged on contract values, never invoice by invoice, and it does not apply where the main part of the supply is zero rated. A joiner building a staircase off site and fitting it in an hour is the classic example.

Credit notes under the reverse charge

A credit note against a reverse charge invoice follows the same pattern: it shows the net amount credited, the VAT credited under the reverse charge for the customer to adjust, and the reverse charge reference. The customer then reduces the VAT it accounted for. See how to correct an invoice.

Checking your customer before you invoice

Before the first reverse charge invoice to a new customer, check two things and keep a note: that its VAT number is valid, and that it is registered for CIS, or that it confirms it reports your payments under CIS. HMRC's guidance for suppliers suggests using the online CIS check, and asking the customer to confirm if it does not show up. Record any end user or intermediary supplier notice you receive. With that file, you can show why each invoice was treated the way it was.

Retentions and stage payments

The reverse charge applies to each payment under a contract that falls within it, including stage payments and retentions. A retention invoiced months after the main work carries the same reverse charge wording as the invoices before it. The guide on retention payments in construction explains the tax point for retentions, and CIS invoice requirements covers the deduction on each payment.

Where to go next

If you are not yet sure whether you should be VAT registered at all, start with do I charge VAT on my invoice. For the standard details every invoice needs, see what a UK invoice must include. The CIS calculator shows both the CIS deduction and the reverse charge VAT for any invoice, and the VAT calculator handles the VAT arithmetic.

Common questions

Can I use my own wording? Yes, as long as it includes the reference "reverse charge" and makes clear the customer must account for the VAT. HMRC's examples are safe choices.

Do I still need my VAT number on the invoice? Yes. A reverse charge invoice must show everything a VAT invoice requires.

Does the reverse charge apply to a householder? No. A private householder is not VAT registered, so you charge VAT normally if you are registered.

What if I apply it wrongly? HMRC's technical guide covers errors; generally, correct the invoice with a credit note and reissue it with the right treatment, and make sure both VAT returns reflect the correction.

Is the reverse charge the same as the reverse charge on services from abroad? No. Businesses also use a reverse charge when they buy certain services from overseas suppliers, but that is a different rule. This guide covers only the domestic reverse charge for building and construction services.