If you’re a VAT-registered subcontractor, there’s a good chance your invoices show £0.00 in the VAT box. What I see far too often is the opposite: invoices that still add VAT when they shouldn’t, or that correctly leave the VAT off but without the wording telling the customer to account for it themselves. Both are wrong, and both are straightforward to fix once you know the rule.
In my time doing construction accounts I’ve found that while most subcontractors know the invoices changed, far fewer know why — and almost nobody was told what it would do to their bank balance.
What the reverse charge does
Normally you charge VAT, collect it from your customer, hold it, and pay it over to HMRC on your next return. Under the reverse charge, that middle bit disappears. You invoice the net amount, add no VAT, and your customer accounts for the VAT themselves.
Here’s the part that surprises people: your customer doesn’t really hand it over either.
They declare the VAT as output tax on their return, and in the same return they reclaim it as input tax, subject to the normal recovery rules. The two cancel out. No money moves. The VAT is only genuinely collected at the end of the chain, when someone makes a supply to an end user and charges VAT the ordinary way.
That’s the whole design. Construction chains can be long, and every business the VAT passed through was a business that could, in principle, collect it and disappear. Taking the money out of the middle of the chain removes that opportunity. It’s an anti-fraud measure, and you’re on the receiving end of it rather than the cause of it.
Does it apply to your invoice?
Four things need to be true. Miss any one of them and you charge VAT the normal way.
- You’re both VAT registered
If your customer isn’t, the reverse charge can’t apply.
- The work falls under CIS
If the payment is reportable under the Construction Industry Scheme, the supply is in scope. Not sure of your status? See CIS deductions: check the status before you pay.
- Your customer isn’t an end user
An end user receives construction services but doesn’t make onward supplies of them — a property owner having work done on their own premises, typically.
- The supply isn’t zero-rated
New-build residential work, for instance, carries on exactly as it did.
The end user rule catches people out
An end user has to tell you, in writing, that they’re an end user. Same for an intermediary supplier — broadly, a connected business in the chain, such as a landlord and its own property company.
No written notification means the reverse charge applies. You don’t have to guess at your customer’s status, and you shouldn’t try to. If you think a customer might be an end user and they haven’t said so, ask them for it in writing and keep it on file.
Mixed invoices go one way or the other
If part of a supply falls under the reverse charge, the whole supply is normally treated that way — you don’t split one invoice between reverse charge and normal VAT.
There’s a relaxation for very small amounts: where the reverse charge element is 5% or less of the value of the supply, it can be disregarded and the whole thing treated under the normal rules. That’s genuinely useful on jobs that are mostly out of scope with a small bit of qualifying work attached, but it’s worth checking rather than assuming.
What has to appear on the invoice
Leaving the VAT off isn’t enough on its own. The invoice has to tell your customer that the reverse charge applies and that they’re the ones who account for the VAT. Wording along these lines does the job:
“Reverse charge: customer to account for the VAT to HMRC.”
Two details matter alongside it:
- Show the rate or the amount the customer must account for — but don’t add it to the invoice total.
- Put it on every affected invoice, not just the first one on a job. Staged applications each need it.
If you get it wrong the other way and charge VAT that shouldn’t have been charged, your customer can’t simply reclaim it — VAT that wasn’t properly chargeable isn’t recoverable input tax. You’d need to issue a credit note and a corrected invoice, which is a tedious conversation to have on a job you’ve already been paid for.
The bit nobody warned you about: cashflow
This is where it stops being an administrative change and starts being a business one.
The VAT was never your money. But for years it sat in your account between the invoice and the return, and it quietly smoothed over a lot of gaps — a slow payer, a bad month, a materials bill that landed early. That cushion has gone.
And it doesn’t arrive on its own. It stacks on top of CIS, which is already taking a slice of your labour before you see it. Here’s the same £4,000 job billed two ways:
| Billing an end user | Billing a contractor | |
|---|---|---|
| Labour | £2,500.00 | £2,500.00 |
| Materials | £1,500.00 | £1,500.00 |
| Subtotal | £4,000.00 | £4,000.00 |
| VAT at 20% | £800.00 | £0.00 (reverse charge) |
| Less CIS at 20% on labour | — | −£500.00 |
| What actually lands | £4,800.00 | £3,500.00 |
Illustrative figures. CIS at 20% assumes you’re registered — it’s 30% if you’re not, and nil with gross payment status.
Same work. Same £4,000 of income. £4,800 in the bank, or £3,500. A £1,300 swing, and not a penny of it is a change to what you earned.
Neither deduction is a loss. The VAT was never yours, and the CIS counts against your own tax bill when you file. But cashflow doesn’t care about that. If you’ve been quoting and forecasting on invoice totals, the reverse charge quietly moved the goalposts. (If the gap between profit and bank balance is a familiar feeling, this is why they never match.)
A note on CIS itself
CIS comes off the labour element only. Materials, plant hire and consumable stores are excluded, which is exactly why it’s worth splitting labour and materials out on the invoice rather than showing one combined figure. If your invoice doesn’t separate them, you’re inviting a deduction on the whole lot.
It’s also calculated on the VAT-exclusive amount — which, under the reverse charge, is the whole invoice anyway.
What to do about it
1. Check whether monthly VAT returns suit you better
Most subcontractors now reclaim more VAT than they charge, because their sales carry no VAT while their costs still do. If you’re regularly due a repayment, quarterly filing means HMRC is sitting on your money for up to three months at a time.
Monthly returns bring it back twelve times a year instead of four. HMRC will normally agree to the change where a business is consistently in a repayment position. More filings, obviously — but if the alternative is borrowing to bridge the gap, it’s not a close call. One caveat worth being honest about: if the repayments are small, the gain can be eaten up by extra accountancy fees, or by your own time if you file them yourself — so weigh the cash against what it costs to get it. There’s more on how the switch works in monthly VAT returns and registering early.
2. Recheck the flat rate scheme
Reverse charge sales don’t count towards flat rate turnover. For a lot of subcontractors that pulled the floor out from under the scheme, because the flat rate percentage is applied to a much smaller number while the inability to reclaim input tax stays put.
If you joined the flat rate scheme before March 2021 and haven’t looked at it since, that’s a calculation worth doing.
3. Quote and forecast on what actually lands
If your cash forecast is built on invoice totals, rebuild it on net receipts. On the example above that’s the difference between planning around £4,800 and planning around £3,500.
4. Set the software up properly
Xero, QuickBooks and the rest all handle the reverse charge, but only if the invoice is raised with the right tax rate against it. Get that wrong and the return is wrong, quietly, every quarter. It’s a ten-minute job to set up and a long afternoon to unpick.
The mistakes I see most often
- Charging VAT to a contractor who should be reverse charge. Usually because the invoice template was never changed.
- Applying the reverse charge to a customer who notified you they’re an end user. The notification is the trigger — file it and act on it.
- Deducting CIS from materials. Labour only. This costs subcontractors real money and is easy to miss when the invoice shows a single combined figure.
- Assuming CIS and the reverse charge always move together. They usually do, but not always — a deemed contractor can be an end user for VAT while still operating CIS. Check them separately.
- Leaving the wording off the invoice. The £0.00 is not the requirement. The statement is.
Frequently asked questions
Why is there no VAT on my subcontractor invoice?
Under the VAT domestic reverse charge, a subcontractor doesn’t charge VAT on most construction work supplied to another VAT-registered business. The customer accounts for it on their own VAT return instead. A £0.00 VAT line is usually correct — but the invoice also has to carry wording saying the reverse charge applies.
What wording has to go on a reverse charge invoice?
Something that makes clear the reverse charge applies and that the customer accounts for the VAT — for example, “Reverse charge: customer to account for the VAT to HMRC.” You also need to show the VAT rate or the amount the customer must account for, without adding it to the invoice total. It goes on every affected invoice, not just the first one on a job.
How do I know whether my customer is an end user?
They have to tell you in writing. An end user receives construction services without making onward supplies of them — a property owner having work done on their own premises, typically. Without written notification the reverse charge applies, so you don’t have to guess. If you think a customer might be an end user and they haven’t said so, ask them for it in writing and keep it on file.
Does CIS come off materials as well as labour?
No. CIS is deducted from the labour element only. Materials, plant hire and consumable stores are excluded. That’s exactly why it’s worth splitting labour and materials out on your invoice — if it shows a single combined figure, you’re inviting a deduction on the whole lot.
Should I move to monthly VAT returns?
Possibly. Reverse charge sales carry no VAT while your costs still do, so most subcontractors are now regularly due a repayment. Monthly returns bring that back twelve times a year instead of four, and HMRC will normally agree to the change where a business is consistently in a repayment position. Weigh the cash gained against the extra filing cost before switching.
Does the flat rate scheme still work under the reverse charge?
Often not. Reverse charge sales don’t count towards flat rate turnover, so the flat rate percentage is applied to a much smaller figure while you still can’t reclaim input tax. If you joined the scheme before March 2021 and haven’t revisited it since, it’s worth recalculating.
What if I charged VAT when I shouldn’t have?
Your customer can’t simply reclaim it — VAT that wasn’t properly chargeable isn’t recoverable input tax. You’d need to issue a credit note and a corrected invoice. Worth catching early, because it’s an awkward conversation to have on a job you’ve already been paid for.
Getting it right
None of this is difficult once it’s set up. The trouble is that it’s the kind of thing that goes wrong invisibly — the invoices look fine, the returns get filed, and the problem only surfaces when someone looks properly, often years later.
If you run a construction business and you’re not completely sure your invoices are right, or your cashflow has felt tighter since the rules changed without anyone explaining why, that’s exactly the sort of thing worth half an hour of someone’s attention.
Invoices right, cashflow understood
We work with construction businesses across Hampshire — subcontractors, contractors and trades. As your ICAEW Chartered Accountant, here is how I can help:
- Reverse charge check — confirm whether it applies to your jobs and customers, and get end user notifications on file
- Invoice wording — set your template up so every invoice carries the right statement and the right VAT treatment
- Software set-up — the right tax rates in Xero so the return is right every quarter, not quietly wrong
- Monthly returns and the flat rate scheme — work out whether either change puts cash back in your business
- CIS alongside it — labour and materials split properly, deductions checked, returns filed on time
This article is general guidance for UK construction businesses, not advice. The rules depend on your own circumstances and the terms of each contract, and rates and thresholds change. Please check the current HMRC guidance and speak to us about your own position before acting on anything here.
