Explore the CIS Reverse Charge, transforming VAT accounting in UK construction since March 1st, 2021. Learn its purpose, conditions, exceptions, and invoicing rules. Whether you’re a contractor or subcontractor, gain essential insights for VAT compliance.

What is the CIS Reverse Charge?

The Construction Industry Scheme (CIS) Reverse Charge is a significant alteration in VAT accounting within the UK construction sector. Initiated on 1st March 2021, this procedure changes the usual VAT accounting process, where now, in specific transactions within the construction industry, the buyer (contractor) is responsible for the VAT instead of the supplier (subcontractor).

The Aim of CIS Reverse Charge?

The primary objective of the CIS reverse charge is to combat VAT fraud in the construction sector. It aims to reduce tax evasion and improve compliance within the construction industry by shifting the VAT payment responsibility from subcontractors to contractors.

This method prevents fraudulent activities, such as missing trader fraud, ensuring that VAT is correctly accounted for and paid to HMRC.

Key Conditions

The reverse charge should be applied when the following conditions are met:

1. The supply is made for VAT of construction services and materials.
2. The transaction is at a standard or reduced VAT rate.
3. Both supplier and customer are UK VAT registered.
4. Both parties are registered under the CIS.
5. The customer plans to make an ongoing supply of construction services.
6. The supplier and customer are not connected entities.
7. The supplier is not an employment business, and the customer is not an end-user.

The Charge Does Not Apply To

The CIS reverse charge does not apply to:

• VAT-exempt building and construction services.
• Supplies outside the scope of CIS.
• Purely staffing or worker supplies.
• Supplies consisting only of materials.
• Transactions made to non-VAT registered customers or end-users.

Included/Excluded Services

Included Services	Excluded Services
Construction, alteration, repair, extension, and demolition of buildings/structures.	Drilling for or extracting oil or natural gas.
Work on land that forms part of the landscape, including infrastructure projects like roadworks, railways, and waterways.	Mineral extraction and related underground construction activities.
Installation of essential systems (heating, lighting, air-conditioning, etc.) in buildings/structures.	Manufacturing and delivery of building/engineering components or machinery.
Internal cleaning as part of construction or renovation projects.	Professional services (architects, surveyors, interior/exterior design consultants).
Preparation or completion services like site clearance, excavation, foundation work, and landscaping.	Artistic work installations (sculptures, murals) unrelated to construction.
	Signwriting, signboard erection, and related advertising installations.
	Installing non-essential fixtures (seating, blinds, shutters, security systems).

Invoices

When issuing invoices under the CIS reverse charge, it’s crucial to adhere to the following guidelines:

Standard VAT Invoice Details 

Ensure each invoice includes all the standard VAT invoice information.

Clear Indication of Reverse Charge

Make it crystal clear that the CIS reverse charge is in play. This means that the customer, not the supplier, takes responsibility for VAT accounting to HMRC.

VAT Amount or Rate

Specify the VAT amount or rate applicable under the reverse charge. Importantly, this doesn’t get added to the total charge to the customer.

Suggested Wording

Your invoices must feature specific wording to signal the application of the reverse charge. Here are some examples:

“Reverse charge: VAT Act 1994 Section 55A applies.”

“Reverse charge: Customer to pay VAT to HMRC.”

“Reverse charge: S55 VATA 94 applies.”

These words are your ticket to ensuring both parties understand their VAT responsibilities and deliver a clear advantage in compliance.

Example of CIS reverse charge

Participants:

• Contractor (Company A): Building the new office.
• Subcontractor (Company B): Specialised in electrical work.

Scenario:

Company A hires Company B for electrical work.

Company B invoices Company A for £10,000, stating the CIS reverse charge applies.

Company A, the contractor, records the £10,000 invoice as both input and output VAT.

Company A pays £10,000 to Company B, deducting £2,000 (20%) for CIS.

Company A remits the £2,000 CIS deduction to HMRC.

Company B reports the payment from Company A but doesn’t charge VAT.

This demonstrates how the CIS reverse charge shifts VAT responsibility to the contractor, ensuring proper tax compliance in construction projects.

How to Account for the Domestic Reverse Charge on Your VAT Return

The introduction of the domestic reverse charge necessitates specific adjustments in your VAT return filing:

Sales Invoices

When applying the domestic reverse charge to your sales, these should be recorded in box 6 of your VAT Return, indicating the value of the sales excluding VAT. There’s no need to enter anything in box 1 for these sales, as VAT accounting for them is the buyer’s responsibility.

Purchases Invoices

If you are purchasing services under the reverse charge as a contractor, you need to account for the VAT differently:

• Output Tax in Box 1: Record the VAT due on these services as output tax in box 1.
• Input Tax in Box 4: Similarly, claim the VAT on these purchases as input tax in box 4, which you normally do for standard VAT transactions.
• VAT-Exclusive Value in Box 7: Enter the net value of these purchases in box 7, as you would with standard transactions.

As always, seeking guidance from a qualified accountant or tax professional is advisable. They can provide tailored advice and ensure your VAT Returns comply with HMRC regulations.

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