Understanding The Reverse Charge & How To Account For It

Understanding the Reverse Charge in the Construction Industry

The Reverse Charge for VAT is a mechanism introduced by HMRC to simplify VAT reporting and prevent fraud in the construction industry. Under this system, the customer accounts for VAT rather than the supplier. This means that if you are a VAT-registered subcontractor working for a VAT-registered contractor, you do not charge VAT on your invoice. Instead, the contractor will calculate and pay the VAT on their VAT return.

This applies to most construction services supplied under the Construction Industry Scheme (CIS) and affects both labour and materials, although CIS deductions are only applied to labour.

For Subcontractors: How to Invoice Correctly

If you are a subcontractor your invoice should clearly reflect the reverse charge rules. Here’s an example for work completed over a week:

If you are a VAT registered sub-contractor completing work for another VAT registered Contractor, your invoice should look like the above.

• No VAT is charged on your invoice

• Include a note stating 'Reverse Charge Applies' or 'Customer (Contractor) to account for VAT'

• Include full price paid for materials to pass on. No VAT also on this line, and note reverse charge applies

• CIS deductions only apply to Labour

• The Contractor will make the relevant adjustment for VAT & CIS on their side

*If materials are supplied with no labour included then this is NOT subject to the domestic reverse charge, charge VAT as usual

For Contractors: How to create the bill to make the correct adjustments

If you are a Contractor you will need to create a bill on your chosen software to make the relevant adjustments from the invoice received by the contractors. The bill should look like this:

When you receive a sub-contractor invoice subject to the reverse charge follow these steps:

1. Enter the bill in your software for the full amounts, in this case Labour = £1500 and Materials = £500

2. Apply CIS deductions only on the Labour, if you are using Xero the Code used should be 'CIS Expense'. This will automatically calculate the CIS deduction. Materials are not subject to CIS but should be coded to CIS 'Materials Purchased' £1500 x20% = £300 CIS deduction

3. Record VAT using the reverse charge mechanism using the tax rate 'Reverse Charge Expenses' for both labour and materials. This ensures the input and output VAT are automatically calculated on your software's VAT return.

4. Pay the sub-contractor £1,700 after CIS deduction

This ensures your VAT returns are accurate and your CIS reporting is correct, reflecting the true cost of subcontracted work.

How Your Accounting Club Can Help

At Your Accounting Club, we specialise in CIS and VAT compliance for the construction industry. Whether you’re a contractor managing multiple subcontractors or a self-employed tradesperson trying to make sense of CIS deductions, we make the process simple and stress-free.

We can help you:

✅ Set up CIS and reverse charge correctly in Xero or Apron

✅ Create compliant invoices and bills with the right VAT and CIS treatment

✅ File accurate VAT returns and CIS submissions to HMRC

✅ Understand exactly what to pay and what to reclaim each month