The invoice goes out the way it always has. Labour, materials, twenty per cent VAT at the bottom, total due in thirty days. The main contractor pays it without a murmur. Nobody in either office gives it a second thought — and the invoice is wrong. It may have been wrong, every time, since March 2021.
That was when the government flipped how VAT works on most building work sold by one business to another. If you missed it, or half-remember a memo from your accountant at the time, here is the plain version. VAT normally works like this: you add it to your invoice, your customer pays it to you, and you pass it on to HM Revenue and Customs — the tax office — when your VAT return goes in. The trouble was fraud. A subcontractor could collect VAT from a main contractor, fold the company, and vanish with the money before the return was ever filed. HMRC calls it missing trader fraud, and construction had more than its share.
So they reversed the flow. Under what’s called the domestic reverse charge, you don’t charge VAT on that work at all. Your invoice has to say the reverse charge applies and show the VAT amount — but you don’t collect a penny of it. Your customer deals with the VAT directly on their own return instead. No money moves, so there’s nothing to steal.
Three facts decide it
Whether an invoice falls under the reverse charge turns on facts about the customer, not about you. Roughly: both of you are VAT-registered in the UK; the work is the kind reported under the Construction Industry Scheme — CIS, the tax scheme that covers payments between construction businesses; and your customer is not the end user. That last term matters. The end user is the final link in the chain — the property owner, the developer, the business having the work done for itself rather than selling it on. Invoices to an end user carry normal VAT. Invoices up a chain don’t.
And here’s the detail that catches people: an end user has to tell you they’re an end user, in writing. No written statement, and the rules say the reverse charge still applies — whatever everyone around the table assumed. That statement is a document. It needs a home. In most offices I’ve looked at, it doesn’t have one, because nobody has ever asked for it.
The patient years are over
For the first few years HMRC went easy on this. The rule was new, it runs backwards to everything a bookkeeper learns, and errors were quietly everywhere. That grace has run out. Tax advisers spent this spring warning that HMRC compliance teams are now actively checking reverse charge treatment across construction supply chains, and raising assessments where they find errors. The arithmetic is unpleasant. Interest on late-paid VAT runs at four percentage points above the Bank of England base rate. If HMRC decides an error was careless, the penalty can reach thirty per cent of the tax. If it decides the error was deliberate — say, charging VAT you knew you shouldn’t so the cash sat in your account for a quarter — it can reach one hundred per cent, and directors can be pursued personally.
It costs you in both directions. Charge VAT where the reverse charge should have applied, and your customer has handed you money HMRC doesn’t treat as VAT at all — when their reclaim fails, they come looking for it back, possibly years after the job closed. Leave the VAT off where it was genuinely due — the customer wasn’t VAT-registered, or the work wasn’t the kind the scheme covers — and HMRC will want from you the VAT you never collected. Either way, the cheque relates to a job that finished long ago, priced on a margin that never allowed for it.
A set-up problem, not an accounts problem
Here’s why I’m writing about it. The reverse charge decision feels like tax law, but look at when it actually gets made: at the moment someone raises an invoice, usually on a Friday afternoon, usually from a template, by a person whose job is not VAT. That is the wrong person and the wrong moment. The decision belongs at job set-up, and it runs on three recorded facts: is this customer VAT-registered, with the number seen and checked; is the work within CIS; has an end-user statement been received — and where is it filed.
Fields on a customer record. That’s all this is. The invoicing screen reads the fields and produces the right invoice — correct wording, VAT charged or merely shown as the facts require, the end-user letter attached to the job it belongs to. If the fields are blank, it doesn’t guess; it refuses, and asks the question. Nobody has to remember anything, which is the point — the rule has been in force for five years and offices have been forgetting it the whole time. This is not a module. It’s one screen and one refusal.
Where this doesn’t apply
If your work is domestic — extensions, lofts, private homeowners — carry on as you were. A homeowner is an end user and usually isn’t VAT-registered, so normal VAT applies and none of this touches you. And if your accountant set the templates up properly in 2021 and the shape of your work hasn’t changed since, you don’t need software for this. You need an hour, once, checking the end-user statements actually exist in a folder somebody can find. Not everything wants a system.
But if your invoices go up a chain — to main contractors, to other subcontractors — and the VAT treatment is running on habit rather than on recorded facts, it’s worth finding out which habit before HMRC does. Get in touch.