A groundworks subcontractor in Derby invoiced his main contractor £42,000 plus VAT in February, and £42,000 with no VAT at all in March. Nothing about the work had changed. What had changed was that the domestic reverse charge for building and construction services had come into force on 1 March 2021, after two postponements.
He had always thought of his VAT as a quarterly bill. In practice it had been an interest-free loan: money collected in month one, paid over in month four, and used in between to buy materials and pay wages. That loan stopped, permanently, in a single month, and his overdraft found out before his accountant did.
The reverse charge moves who accounts for the VAT, not whether it is due
Under the normal rules, a supplier charges VAT, collects it and pays it to HMRC, and the customer reclaims it. Under the domestic reverse charge, the supplier charges no VAT. The customer accounts for the output VAT on their own return and, in the same box exercise, reclaims it as input VAT. The net effect for HMRC is nil, which is the point: the money never sits with an intermediary who might disappear with it. The measure exists to attack missing trader fraud in construction labour supply chains.
It applies where all of these are true. The supply is of construction services that fall within the scope of the Construction Industry Scheme. Both parties are VAT registered in the UK. Both parties are registered for CIS. The supply is standard rated or reduced rated. And the customer is not an end user or an intermediary supplier.
It does not apply to zero-rated supplies, so most new-build housing work stays outside it. It does not apply to supplies of staff by an employment business. It does not apply where the customer is not VAT registered, or is not CIS registered.
The scope follows CIS, which means it covers more than you might expect. Site preparation, groundworks, alterations, repairs, painting and decorating, installation of heating and lighting and drainage, and demolition are all in. Some things are outside CIS and therefore outside the reverse charge: the manufacture of components off site, the professional work of architects and surveyors, and the installation of certain equipment such as seating or blinds. Where a single contract mixes work that is in with work that is out, the reverse charge applies to the whole invoice if any element of it is caught. There is a relief in the other direction: if the reverse charge element is 5% or less of the value of the supply, you can disregard it and apply normal VAT rules to the lot.
End user is a status the customer has to claim in writing
This is where most of the arguments happen.
An end user is a business that receives construction services for itself rather than to make an onward supply of construction services. A retailer having a shop fitted out is an end user. A property owner having a roof repaired is an end user. A main contractor building a hotel for a developer is not, because it is supplying construction services onwards.
An intermediary supplier is a business connected to an end user, or with a shared interest in the land, that buys construction services and supplies them on within the group. Intermediary suppliers are treated like end users, so normal VAT rules apply to supplies made to them.
The critical mechanic is that the customer has to tell you. HMRC's position is that the reverse charge applies unless the customer has confirmed in writing that they are an end user or intermediary supplier. If you do not have that confirmation, apply the reverse charge. If you charge VAT to a customer who should have accounted for it themselves, that VAT is not properly charged, they cannot reliably reclaim it, and you may find yourself refunding it while still having paid it over.
The practical answer is a standing statement in your contract terms and a tick box at the point of quoting. Get it once per customer, in writing, keep it, and revisit it if the relationship changes. Developers who are sometimes end users and sometimes not are the ones that generate the corrections.
The invoice has to say so, and the wording is on you
A reverse charge invoice is a normal VAT invoice with two differences.
It must state that the domestic reverse charge applies and that the customer is required to account for the VAT. HMRC accepts wording along the lines of "Reverse charge: VAT Act 1994 Section 55A applies" or "Reverse charge: customer to pay the VAT to HMRC". The exact phrasing is not prescribed; the clarity is.
And it must show the rate of VAT that would have applied, or the amount of VAT, without including that amount in the total charged. So a £10,000 invoice says £10,000 due, notes £2,000 of VAT at 20% for the customer to account for, and the customer pays you £10,000.
If your invoicing software does not have a reverse charge setting, it will after an update, and in the meantime a manual line is fine. What is not fine is a VAT-inclusive total, because you will have been paid VAT you must then hand back.
The cash flow hit is permanent and it is bigger than people assume
For a subcontractor whose customers are all main contractors, the reverse charge removes a float worth roughly a fifth of turnover for the part of a quarter it used to sit in your account. That is not a loss of profit. It is a one-off, permanent reduction in working capital, and it arrives at the moment of transition rather than gradually.
Three responses are worth considering.
Move to monthly VAT returns if you are now in a repayment position. Many subcontractors are, because they still pay VAT on materials, plant hire and fuel while charging none on their sales. Monthly returns turn an annual repayment pattern into twelve smaller ones and shorten the wait for your money.
Review the Flat Rate Scheme, which usually stops making sense under the reverse charge. Reverse charge sales are excluded from flat rate turnover, so you keep the scheme's restriction on reclaiming input VAT while losing most of the benefit.
And reprice the work, or at least reprice the payment terms. A subcontractor who lost a VAT float and did not adjust anything simply became a business with less cash in it.
Main contractors sit on the other side of the same trade. They stop paying out VAT they would have reclaimed later, so their working capital improves. It is worth knowing that when you are negotiating payment terms with one.
Where this shows up in the game
Business Baron runs VAT properly, in integer pence, with the rate table changing underneath you, and that applies to the building trades in the full game and to the construction firms in the Property & Construction Track alike. A change like this one alters the cash flow of a whole trade without moving the profit and loss account at all. That gap between profit and cash is most of what the game is about.