VAT – Domestic Reverse Charge

What is it?
Brought in March 2021, businesses that supply construction services to VAT registered customers no longer apply VAT to invoices. Instead, the customer accounts for the VAT.

The charge applies to standard and reduced-rate services which fall within the scope of CIS and where the customer 
is not the end user.

Further information can be found 

What does this mean for sub-contractors?
Subcontractor invoices will no longer include VAT. Instead, there will be a statement on the invoice that should read:

‘Services provided are subject to domestic reverse VAT rules at 20% (or 5%) – Customer to pay the VAT to HMRC.’

You must not enter any output tax on sales under the reverse charge. Only the net value of the sales needs to be entered in box 6.

What does this mean for contractors?
If you are a main contractor receiving a domestic reverse charge invoice from a sub-contractor, you should:

  • Continue to record it as a normal expense invoice and include the input tax in box 4 of the VAT return.

  • The net purchase should be accounted for in box 7.

  • As this is reverse charge, you also need to account for the output tax in box 1 – the overall effect is VAT neutral.

  • Make sure you do not enter the net value of the purchase as a net sale (no entry in box 6).

Please see below for a practical example.

Can you still use bridging software?
Yes you can. Bridging software is simply a tool to send your MTD VAT return to HMRC. The new rules only impact the way you do your invoicing and how the VAT return is populated. How you file your MTD VAT return has not changed.