VAT Reverse Charge: What it means for your construction business

March 5, 2024
Andrew Knowles

If your business supplies building and construction services to a main contractor, it’s likely that you’ll experience a reduction in your cashflow due to new VAT rules. It’s important that you plan for the impact of this change.

The VAT domestic reverse charge for building and construction services, which began on 1 March 2021, means subcontractors no longer invoice for or receive VAT from their main contractors. 

When you work on projects where this new scheme applies, you’ll no longer invoice for, or receive, the VAT element on sales. In practical terms, this means that when you raise a sales invoice you won’t add VAT to it. 

This is likely to have an impact on your cashflow, as you’ll be receiving less money from your customer when they pay. This impact is short term, as under the old system you would have had to pay the VAT over to HMRC on completion of your VAT return.

The responsibility for accounting for the VAT is now with the contractor, not with you.

The VAT reverse charge will apply to projects reported under the Construction Industry Scheme (CIS), where both the sub-contractor and contractor are VAT registered. It makes the main contractor responsible for accounting for the VAT.

How the VAT reverse charge works

Here’s an example of how invoicing under the new scheme works.

Before 1 March 2021, if you invoiced the contractor for £1,000 you also had to add £200 in VAT. The contractor paid you £1,200. It was your responsibility to report the £200 of sales VAT to HMRC, on your VAT return, and to pay it. 

From 1 March 2021, when you invoice the contractor for £1,000 you do not add any VAT and you don’t need to account for it on your VAT return.

It’s the contractor's responsibility to account for the VAT. 

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Quick facts about the VAT reverse charge

This information is provided as a guide. For the details of exactly how the VAT reverse charge will apply to your business we recommend that you consult with your accountant.

  • The VAT reverse charge took effect on 1 March 2021.
  • It probably applies if you’re VAT registered in the UK, you supply building and construction industry services, your customer is also VAT registered in the UK, and payment for supply is reported in the Construction Industry Scheme (CIS).
  • When VAT reverse charge applies, you invoice your customer only the net amount - you do not add VAT.
  • Your customer will only pay you the amount you invoice. 
  • Your customer will account for the VAT. 
  • This scheme does not apply on improvements to homes or other property where the customer is not VAT registered - typically a home-owner.

There are a number of exemptions from the VAT reverse charge scheme, so it’s important that you take professional advice.

Actions you should consider taking

1. Find out whether the construction projects you’re involved with come under the scope of the VAT reverse charge scheme. 
2. Ensure that your accounting systems can handle the new VAT rules under the scheme. Your accounting software provider should supply an upgrade and relevant information.
3. Make sure that your team members who deal with finance and purchasing matters are fully aware of the scheme and its implications.
4. Assess the impact of the changes on your cashflow. If you’re a sub-contractor on a project where the scheme applies, you’ll no longer be paid the VAT element of your invoices, meaning you’ll receive significantly less cash. However, your VAT return payments will be less.

How we can help

We help construction businesses raise the working capital they need in order to keep paying suppliers and payroll. The funding solutions we can help you with include loans, invoice finance and asset finance. Depending on circumstances, the arrangements can be either secured or unsecured.

If you’re facing a cashflow shortfall because of the VAT reverse charge scheme, or for any other reason, get in touch with us to discuss your options. We’re helping other businesses in the construction sector right now and our specialists understand the issues you face.

Don’t let the VAT reverse charge scheme create a cashflow problem for you. Get in touch today to discuss your options.

Jamie Davies
Managing Director

As a founder of multiple businesses, Jamie believes that mindset, discipline and ambition are key drivers for success, both for his businesses and for his clients. 

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