Under the reverse charge, a VAT-registered subcontractor supplying construction services to a VAT-registered contractor does not charge VAT on the invoice. The customer accounts for it instead, declaring the output tax and reclaiming the input tax on the same return.

It applies to standard and reduced rate supplies reported under the Construction Industry Scheme. The list of covered work mirrors the CIS list of construction operations, with the exception of workers supplied by employment businesses. So groundworks, scaffolding, plastering, heating and ventilation installation, painting, site clearance and roadworks are all in scope.

Some things sit outside it when supplied on their own. Delivering materials to site. Architects and surveyors. Manufacturing components off site. Installing security systems, blinds or seating. Signwriting. If your invoice is only for one of those, normal VAT rules apply and you charge as usual.

The mixed invoice is where it gets awkward. If a job includes both reverse charge work and excluded work, the whole supply goes under the reverse charge. People split them out and get it wrong. HMRC guidance is on gov.uk if you want the detail.

This is the part we spend most time on. If you are a subcontractor, you used to invoice with VAT on top, hold that money for up to three months, and pay it over at quarter end. That VAT was never yours, but it sat in your account and it funded wages, materials and plant hire in the meantime.

Under the reverse charge, it never arrives. Your income drops by a fifth overnight on the affected invoices, and the working capital that was quietly propping up your payment cycle disappears with it.

Businesses that were already tight felt this immediately. Businesses with a margin absorbed it and never quite worked out why cash felt harder. Either way, the fix is the same: rebuild the forecast on net receipts and stop treating the VAT account as a buffer.

There is an upside if you are regularly in a repayment position. A subcontractor with material costs and reverse charge sales may now reclaim more than they declare. If that is you, moving from quarterly to monthly VAT returns brings the refunds in four times faster. We check that for construction clients as part of the set-up review, and it is a change a lot of owners have never been offered.

The reverse charge stops at the end of the chain. An end user is a business, or group of businesses, registered for VAT and CIS that does not make an onward supply of the construction services it receives. A property developer building for its own portfolio is the usual example.

Two things about this get muddled constantly.

First, the declaration has to come from the customer, in writing. It is not something you assume from the look of the job. Once a customer tells you in writing that they are an end user, you charge VAT normally and you do not need to interrogate their registration status further.

Second, a private householder is not an end user. They are simply not VAT registered, so the reverse charge never applied in the first place. You charge VAT as normal. The distinction sounds academic until someone files a quarter on the wrong assumption.

There is also a 5% disregard. A customer who is broadly an end user but re-supplies less than 5% by value of what they receive can still issue the declaration. And intermediary suppliers, connected businesses buying and passing on services without material change to a linked end user, can be treated as end users too.

Get written declarations on file. Review them when a customer’s business model changes.

This comes up more than it should. A subcontractor invoices you with VAT on top, you explain the reverse charge, and they tell you their other customers have no problem with it and they would rather not deal with CIS at all.

You cannot reclaim VAT that should never have been charged. If HMRC looks at that return, the input tax comes out and the liability is yours, not theirs. So paying the invoice as issued to keep the job moving is a decision with a price attached.

What works, in our experience, is to put the correction in writing, ask them to reissue, and offer to send the HMRC guidance page to their accountant. Most of the time it is genuine confusion rather than obstruction, and the accountant settles it in a phone call.

The related fight is the labour and materials split. If a supplier will not break the invoice down, you have no reliable basis for the CIS deduction. The practical answer is to tell them that without a split you will treat the whole amount as labour, which is rarely what they want. Worth remembering that any mark-up they add to materials falls within CIS as well.

Compliance activity around the reverse charge has become noticeably more rigorous over the past year, and the errors that surface are repetitive rather than exotic.

• Invoices that omit the required wording. A reverse charge invoice has to state that the reverse charge applies and show the VAT rate or amount the customer must account for, without adding it to the total.
• Output tax declared in box 1 but the corresponding input tax left out of box 4, so the business pays VAT it was entitled to reclaim.
• Software set up with the wrong default tax code, applying the charge to every construction sale including those to householders.
• End user declarations taken verbally and never recorded, then unavailable when asked for.
• Flat rate scheme users who forgot that reverse charge purchases and sales sit outside the scheme entirely. That combination usually means the flat rate scheme has stopped being worth it.

None of these are hard to fix. They persist because nobody is looking at the VAT return before it goes, and because the bookkeeping and the advice sit with different people who never speak.