I’m a contractor. What does the VAT reverse charge for construction services mean for my business?
Receiving an invoice from your supplier
- For supplies that fall within the VAT domestic reverse charge rules you should receive an invoice from any VAT registered subcontractor with no VAT, but with a statement that reverse charge rules apply.
- It is your responsibility to ensure the invoice you receive has correctly applied the reverse charge rules. If in doubt you should query an invoice with your subcontractor.
Bookkeeping
- When it comes to your VAT return, enter in box 1 of the VAT return the output tax on purchases to which the domestic reverse charge applies. But do not enter the value of such purchases in Box 6.
- You may reclaim the input tax on your domestic reverse charge purchases in Box 4 of the VAT return and include the value of the purchases in Box 7, in the normal way.
- There should be no net impact on your overall VAT bill.
Example
A subcontractor provides a reverse charge invoice for £1,000. The VAT that they would previously have charged would have been £200. The VAT return for this one transaction only would look like this:
| Box | £ | ||
| VAT due on sales | 1 | 200 | |
| VAT due on EC acquisitions | 2 | ||
| Total VAT due | 3 | 200 | |
| VAT reclaimable on purchases | 4 | 200 | |
| Net VAT payable | 5 | 0 | |
| Value of sales | 6 | ||
| Value of purchases | 7 | 1,000 | |
- You need to ensure you account for these correctly in your accounting software and this may require an update to your accounting software if you do not use cloud software.
Our bookkeeping spreadsheet will not do this for you and we recommend that purchase bookkeeping software, such as
- Xero
- QuickBooks online
- Free Agent (free if you have a NatWest bank account)
- Sage 50 Cloud Accounts and Sage Business Cloud Accounting
Cashflow
You may gain a cash flow benefit because the VAT you previously had to pay when paying subcontractors, but could not reclaim until your next VAT return, is simply netted off in your VAT return. There should be no net impact on your overall VAT bill.
However, to ensure you don’t pay too much or too little VAT, make sure the invoice you receive is correct, especially with regard to the correct VAT rates, and ensure the services listed are eligible for the reverse charge.
Raising your sales invoice
If you are invoicing an end user or a customer not VAT registered and not within CIS, then you will charge VAT as normal.
If you are in the middle of the chain and your sales invoice falls within the VAT domestic reverse charge rules, then please read our guidance on subcontractors.
For full guidance please click here.
