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Part 4 of 7 · CIS deduction checker series ~5 min read

The reverse charge, and the VAT line that should not be there

The domestic reverse charge arrived on 1 March 2021 and moved the VAT on most construction services from the subcontractor’s return to the contractor’s. Five years on, most invoices say the right thing. The ones that do not look perfectly normal, which is exactly the problem.

Key takeaways

  • The reverse charge covers standard and reduced rated services reported under CIS, to a VAT-registered customer.
  • Written confirmation from a customer that is an end user or intermediary supplier switches it off.
  • The invoice must make clear the reverse charge applies. The contractor accounts for the VAT.
  • A subcontractor not registered for VAT charges none and is outside the reverse charge.
  • An invoice charging VAT on a reverse-charge supply goes back for a credit note before it is paid.

Should this invoice carry VAT?

Deciding whether the domestic reverse charge applies to a subcontractor invoiceA vertical chain inside an AWS account container, entered from a box on the left labelled An invoice from a subcontractor, already read. The first step asks whether the subcontractor is VAT registered, on the invoice and on the record, with a side exit reading no: No VAT at all, and no reverse charge either. The second asks whether the work is zero-rated, such as some new dwelling work, with a side exit reading yes: Zero-rated, outside the reverse charge. The third asks whether this contractor has given an end-user notice in writing, with a side exit reading yes: Normal VAT, charged by the subcontractor. The final step is Reverse charge: no VAT charged, and wording that says so. A note says a contractor that sells its work on is not an end user, so the third exit is almost never taken, and a VAT line on a subcontractor invoice is usually wrong.AWS ACCOUNTAn invoicefrom a sub,already readSub VAT registered?on the invoice andon the recordNo VAT at alland no reversecharge eithernoZero-rated work?such as some newdwelling workZero-ratedoutside thereverse chargeyesEnd-user notice given?by this contractor,in writingNormal VATcharged by thesubcontractoryesReverse chargeno VAT charged, andwording that says soA contractor that sells its work on is not an end user, so the third exit is almost never taken. A VAT line here is usually wrong.
Fig 1. Three exits and a default. For a contractor that makes onward supplies, nearly every subcontractor invoice ends at the bottom, which is why the system treats a VAT line as a question rather than a number to key.
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The conditions, as HMRC sets them out

The domestic reverse charge applies to building and construction services that are within the scope of CIS, standard or reduced rated for VAT, and supplied to a customer registered for VAT in the UK, unless that customer has given written confirmation that it is an end user or an intermediary supplier. Zero-rated services are outside it, and so is an employment business supplying staff.

Under the reverse charge the subcontractor does not charge VAT, and the invoice has to make clear that the reverse charge applies. HMRC’s examples of acceptable wording include Customer to pay the VAT to HMRC. The contractor then accounts for the VAT on its own return, and a fully taxable contractor normally reclaims the same amount as input tax, so the cash effect nets to nothing.

The end-user notice runs the other way

A contractor sits in the middle of two supply chains at once. Inbound, it buys from subcontractors and is almost never an end user, because it makes onward supplies of the same services to its own client. Outbound, it sells to that client, who may be an end user and may well have written to say so. The Leicester contractor has both: a developer that sells its buildings on, and a commercial landlord registered for VAT and CIS that has confirmed in writing it is an end user.

The outbound side is not this system’s job, but the inbound check depends on getting the direction right. The notice that matters for a subcontractor’s invoice is one the contractor gave the subcontractor, and for a business in the middle of the chain the correct number of those is usually zero.

One tax month of invoices

One tax month of subcontractor invoices grouped by VAT treatmentA horizontal row of five boxes joined by arrows. Forty-one invoices from the subcontractors in one tax month. Twenty-nine under the reverse charge, with no VAT and the wording present. Eight with no VAT because the subcontractors are not VAT registered. Three that charge VAT on reverse-charge supplies, in error. And one with no VAT but nothing saying why. A note says the fourth box costs money if it is keyed as written, and the fifth costs nothing in cash but still needs a corrected invoice.ONE TAX MONTH OF SUBCONTRACTOR INVOICES, BY VAT TREATMENT41 invoicesfrom the subs inone tax month29 correctreverse charge,wording present8 no VATsubcontractors notVAT registered3 VAT chargedon reverse-chargesupplies, in error1 no wordingno VAT, and nothingsaying whyThe fourth box costs money if it is keyed as written. The fifth costs nothing in cash and still needs a corrected invoice.
Fig 2. The invoices in one tax month, sorted by what the VAT line says. Thirty-seven need nothing; four go back to the subcontractor.
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Why VAT charged in error is held, not paid

An invoice charging 20 per cent VAT on a reverse-charge supply looks like any other invoice, and the easy path is to pay it and reclaim the VAT on the next return. HMRC’s guidance closes that path. The contractor can be assessed for the output VAT it should have accounted for under the reverse charge, which offsets the input tax it thought it was reclaiming, and getting back what it paid the subcontractor as VAT is a commercial matter between the two of them rather than a claim against HMRC.

So the invoice is held, and the query asks for a credit note and a reissued invoice with the reverse-charge wording. At the Leicester contractor it is three a month, almost all from the same two subcontractors, which makes the conversation short once it has been had.

The deduction does not notice, and that is a trap too

The CIS deduction is calculated on the payment excluding VAT whichever way the VAT line is handled, so a VAT error never shows up as a deduction error. The two checks run on the same read and write separate fields for that reason. A single pass-or-fail would report a perfectly calculated deduction on an invoice that should never have been paid as written.

Subcontractors who are not VAT registered need one more note. They charge no VAT and sit outside the reverse charge, but the VAT they paid on materials is part of what they actually paid, and it comes out of the deduction base with the materials. The read keeps materials gross of VAT for them and net of VAT for registered subcontractors, and records which it did.

What the VAT check records, per invoice

  • Supplier VAT status. From the invoice and the supplier record, and whether they agree.
  • Treatment. reverse_charge | standard | zero_rated | not_registered.
  • Wording. The reverse-charge note as printed, or absent.
  • VAT to account for. The output VAT the contractor owes under the reverse charge.
  • Held reason. vat_charged_in_error | wording_missing, with the query sent.

The next post puts the month together: the return, the statements, the payment to HMRC, and the date all three are due.

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