VAT in construction is harder than in almost any other industry, and it is not because the rules are complicated. It is because four separate things overlap. The reverse charge, the reduced rate, zero rating, and CIS.
Most errors we find come from applying one of those correctly while forgetting another one applies too.
The domestic reverse charge
Since 1 March 2021, when a VAT registered construction business invoices another VAT registered construction business for work reported under CIS, no VAT is charged. The customer accounts for it on their own return instead.
Three conditions have to hold:
- Both parties VAT registered
- The work is reported under CIS
- The customer is not an end user or intermediary supplier
The invoice still has to state that the reverse charge applies and show the VAT rate or amount, even though you are not charging it. An invoice with the VAT simply left off and no wording is wrong, and your customer cannot process it properly.
End users
An end user is the business that will use the building rather than sell the construction service on. A homeowner. A landlord doing work on their own property.
They have to tell you in writing. Without that notification you apply the reverse charge. If you think a customer is an end user and they have not said so, ask, because guessing is expensive in both directions.
Where it does not apply
- The customer is not VAT registered
- Zero rated work, which covers a lot of new build
- Work outside the scope of CIS
- The 5% disregard, where the reverse charge element is 5% or less of the invoice value and you can treat the whole thing normally
What it did to cash flow
Worth saying plainly because nobody warned anyone at the time. You used to hold your customer’s VAT for up to three months before paying it over, and most firms had built that into how they funded work.
Under the reverse charge that money never arrives. If your cash position got tighter in 2021 and you never worked out why, that is why.
The rates, and when the reduced rate applies
| Rate | Typical use |
|---|---|
| 20% standard | Most repairs, maintenance, alterations and commercial work |
| 5% reduced | Certain conversions and renovations, and some energy saving installations |
| 0% zero | New build residential, and some work for charities |
The 5% rate is the one most often missed, and missing it means quoting 15% higher than a competitor who knows about it.
It applies to work like converting a house into flats or flats into a house, converting a non residential building into a dwelling, and renovating a dwelling that has been empty for two years or more. Each has conditions and each needs evidence kept.
Zero rating on new build
Construction of a new dwelling is zero rated, which means you charge no VAT and can still recover your input VAT. That is more generous than exemption and it is worth getting right.
The conditions are strict. It has to be genuinely new rather than a conversion or an extension, it has to be a dwelling, and there are rules on what counts as a separate planning consent. Get it wrong and HMRC assesses you for the VAT you never charged.
Materials and fittings follow their own rules too. Some things you install are zero rated with the build, others are blocked and stay standard rated whatever the job.
Where VAT and CIS get tangled
They are different schemes with different thresholds and they interact constantly.
The reverse charge only applies to work reported under CIS, so whether a job is inside CIS decides your VAT treatment as well as your deductions. And the CIS deduction is calculated on the amount excluding VAT, which is easy to get wrong on a reverse charge invoice where there is no VAT shown to exclude.
Materials are treated differently again. They come out of the CIS calculation but they are part of the VAT supply.
Registration and the flat rate scheme
Once your taxable turnover crosses the threshold you have to register, and construction turnover gets there quickly because materials are in the figure.
The flat rate scheme rarely suits construction now. Under the reverse charge you are not collecting output VAT on most sales, so there is little to apply a flat percentage to, and you lose input VAT recovery on materials. Most firms that were on it should have come off it in 2021.
The errors we see most
- Charging VAT on a reverse charge invoice, which the customer then reclaims incorrectly
- Applying the reverse charge to an end user who did notify, in an email nobody filed
- Missing the 5% rate on a conversion and quoting too high
- Zero rating an extension as if it were new build
- Staying on the flat rate scheme after March 2021
If you want a second opinion on yours
A month of invoices tells us most of what we need to know. We will tell you whether the treatment is right and what it is costing if it is not.
Have a look at how we handle VAT or book a call.