A fundamental change to VAT charged within the construction industry came into effect on 1 March 2021.

As a sub-contractor you should no longer charge VAT on your invoices to other businesses in the construction industry if all of the following conditions apply:

• the work done would be subject to 20% or 5% VAT (not zero-rated);
• the work falls within the scope of the construction industry scheme (CIS); and
• your customer is registered for both the CIS and VAT.

Instead of you charging VAT your building company customer should account for the VAT as both a purchase and a sale in their accounting system, known as a 'reverse charge' entry. This VAT treatment should apply to the whole invoice value including the charge you make for materials used.

To inform your customer that they need to do the VAT reverse charge treatment your invoice should carry a note along the lines of: 'reverse charge [customer] to pay the VAT to HMRC.' This note should also state either the rate or the amount of VAT due on the work.

You need to confirm whether your customer is correctly VAT registered before issuing that invoice to them. Do this using HMRC's online VAT number checking service: www.gov.uk/check-uk-vat-number.

There are two situations where you should charge VAT as normal:

• your customer is an 'end user' such that the work is not being charged on to someone else, for example work done in your customer's own building; or
• your customer is an 'intermediary' business connected with the end user by being in the same corporate group or by having an interest in the same land, such as a landlord and tenant would.

Your customer should tell you if they are the end user for the work done or if they are an intermediary.

If you are still using the VAT flat rate scheme for small businesses we need to review whether this is still appropriate for you. We can also check whether your accounting software is set up correctly to cope with this VAT change.

Last updated: April 29th 2021.