Confusing VAT Rules for Builders and Subcontractors: Simplified!

What is the VAT reverse charge?

This is a special VAT rule where the customer pays the VAT instead of the business. It can be confusing, but here's the basic idea for builders and subcontractors:

• Normally, a builder charges VAT on their services.

• With the reverse charge, the subcontractor doesn't charge VAT on their invoice.

• Instead, the builder pays the VAT themselves and declares it on their VAT return.

Who does it apply to?

• This applies to registered builders and subcontractors working on construction projects under the CIS (Construction Industry Scheme).

• It only applies if both the builder and subcontractor are VAT registered.

What if one of us isn't VAT registered?

• If the builder isn't VAT registered, you (the subcontractor) charge VAT normally (5% or 20%).

• If you (the subcontractor) aren't CIS registered, the builder might deduct more tax (30% instead of 20%).

How do we handle the paperwork?

• If the reverse charge applies, your invoice should show the total amount but no VAT amount.

• You can mention the VAT rate somewhere on the invoice.

• The builder will record the purchase with VAT on their VAT return.

For more details:

• This is a simplified explanation. There are more complex rules for overseas transactions.

• Check the links below for the full details:

  • https://www.gov.uk/guidance/the-vat-domestic-reverse-charge-procedure-notice-735

  • https://www.gov.uk/guidance/the-vat-domestic-reverse-charge-procedure-notice-735

Remember, this is just a guide. If you're unsure, always consult a tax advisor.