What the hell is the domestic VAT reverse charge in construction and how the eff does it work?

If you work in construction, you’ve probably heard of the VAT reverse charge. The new law caused a lot of confusion for tradies up and down the country, and the initial guidance didn’t do much to help. Luckily for you lot, things are much clearer now. Here’s our handy guide to the reverse charge, and what it means for your business.


What’s changed?

It was delayed a few times, but  the VAT reverse charge finally came into effect in March 2021. As the name suggests, it reverses the direction of VAT payments for contractors and subcontractors. In the past, you’d charge your clients VAT for your work. Now, it’s on them to  pay it directly to HMRC.

This is an anti-fraud measure, aimed at stopping cowboy construction guys (we’ve all met them) from overcharging for VAT and pocketing the difference. There are laws like this in other industries that lend themselves to dodgy dealing too, including the sale of mobile phones and computer chips.


Does the reverse charge apply to me?

If you supply goods or services as part of a construction project, then yeah, the reverse charge probably applies to you. An easy way to work it out is that the reverse charge applies if both you and your customer are registered for UK VAT,  and the payment falls under the Construction Industry Scheme.

The main exceptions are services provided to “end users”. In plain English, that means customers who aren’t part of an ongoing supply chain, like home owners paying for improvements or retailers having their store refurbished.

Some savvy customers might be exempt from the reverse charge, but want to pay it anyway to help boost their cash flow. That’s a straight up, legit thing to do – and it’s for them to decide. Either way, it’s up to the customer to let you know whether they’re exempt or not, so assume the charge applies unless you’re told otherwise.

There are some types of work that aren’t covered by the charge either. Most of your standard construction jobs are included, but some specialist stuff isn’t:

  • Drilling for oil
  • Extracting minerals
  • Manufacturing components for machinery
  • Installing or repairing works of art

You can find out more about specialist exemptions on the government website.


How can I make sure I get it right?

HMRC took a light touch to enforcing the new law for the first six months, but that’s changed now. If you don’t apply the reverse charge correctly, you could be whacked with a pretty big fine. Nobody wants that, so update your ways of working to make sure you’re covered. Start by:

  • Familiarising your crew with the reverse charge and offering uptraining if you need to.
  • Changing your invoice template to include the reverse charge.
  • Updating your accounting software to apply the reverse charge automatically.
  • Speaking to your regular customers to make sure they understand their new obligations.

Even with the recent clarification, the reverse charge is a complicated law and a bit of a bastard to understand.  People ask us about it a lot, so you’re not on your own if you’re still feeling like you don’t have a clue what it means. It’s best not to risk getting it wrong, so give us a bell and we’ll make sure you’re sorted.

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