The reverse charge invoice: what to write on it and what happens to your cash flow

You invoice a main contractor £12,000 for a fortnight of second fix. Before 1 March 2021 you added £2,400 of VAT, £14,400 was billed, and that £2,400 sat in your account until the quarter closed. Now you add nothing, the payment arrives short of the VAT and short of the CIS deduction, and you are still handing 20% to the merchant on every load of materials you collect.

That is the VAT domestic reverse charge. It is one line of wording on an invoice and a permanent change to how much cash moves through your business. This page is what the line has to say, the six conditions that switch it on, what happens to the materials, and how to get your input VAT back a month faster than the default.

Where the confusion starts

The reverse charge tends to arrive in your inbox as somebody else's confusion. Here is a self-builder on BuildHub trying to pin down the VAT on a supply and fit timber frame, and another member going straight to where the supplier's answer probably came from:

"Maybe the company or the company's accountant have got confused with the domestic reverse charge however in any event this only applies to companies or individuals registered for VAT"

a member of BuildHub's self-build VAT forum

That diagnosis is correct, and it is the shape of the problem in both directions. The rule only bites between VAT registered businesses on payments inside CIS, so it gets applied to householders it has nothing to do with, and left off invoices between two businesses where it was compulsory. HMRC's own line on the first of those is flat: "The reverse charge does not apply to consumers or final customers of building and construction services."

The line that has to be on the invoice

The reverse charge sits in section 55A of the Value Added Tax Act 1994, switched on for construction by the Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order 2019, SI 2019/892. The Order was made to start on 1 October 2019, deferred twice, and has been in force since 1 March 2021.

Mechanically it moves one job from you to your customer. You raise the invoice with no VAT added. Your customer accounts for the output VAT to HMRC and reclaims it as input VAT on the same return, so the tax nets to nil for them and the money stops travelling down the chain.

HMRC's technical guide is specific about what the invoice has to carry. You show everything a VAT invoice normally shows, plus a note making it clear that the reverse charge applies and that the customer has to account for the VAT. Any of these will do:

Then the amount. HMRC's instruction is that you "clearly state how much VAT is due under the reverse charge, or if this amount cannot be shown, state the rate of VAT, but do not include the VAT in the amount charged to the customer". So the £2,400 appears on the page as information and stays out of the total. If your invoicing software refuses to display a VAT figure it is not charging, HMRC accepts wording saying "customer to account to HMRC" instead.

Your own VAT return still recognises the sale. You declare no output tax on it, and you carry on reclaiming input tax on everything you bought to do the work in the ordinary way.

Six things have to be true

The reverse charge is not a choice either party makes. It applies when the supply meets every one of these, and it does not apply when any one of them fails.

The rate condition does more work than it looks. Zero-rated construction sits outside the scheme entirely, and it takes its incidental standard-rated parts with it: HMRC's rule is that "The reverse charge does not apply to standard-rated items which are included in a zero-rated supply of building and construction services." Build a new dwelling and the whole supply is zero rated and invoiced with VAT shown at 0%, reverse charge wording absent. Which rate a job actually carries is the subject of the zero and reduced rate guide.

Some construction-adjacent work sits outside the scheme when it is supplied on its own: the professional work of architects and surveyors, manufacturing components or plant off site, installing security systems including CCTV and burglar alarms, installing seating, blinds and shutters, signwriting and signboards, and artworks such as sculptures and murals. Supplied as part of a larger job that is caught, they come with it.

One category catches out labour suppliers. HMRC draws a hard line here: "Supplies by employment businesses are not subject to the reverse charge, even if those supplies are within the scope of the Construction Industry Scheme", because "A supply of labour only construction services is subject to the reverse charge but a supply of staff is not." A labour-only subcontractor doing the work is in. An employment business placing bodies with a contractor is out and charges VAT in the ordinary way.

The end user declaration is your customer's to write

The most useful exception is the end user. An end user is a business, or group of businesses, registered for both VAT and CIS, that does not make an onward supply of the construction services it receives. A developer building for its own account, a retailer fitting out its own shop, a landlord improving its own building: the chain stops with them, so the reverse charge has nothing left to pass the VAT along to.

HMRC's condition is that "The reverse charge does not apply for supplies to end users when the end user tells their supplier or building contractor in writing that they're an end user." Writing means by post, by email, or written into the contract. HMRC's own suggested wording is short enough to paste into a contract schedule:

"We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Issue us with a normal VAT invoice, with VAT charged at the appropriate rate."

Intermediary suppliers get the same treatment. These are VAT and CIS registered businesses connected or linked to an end user, either because they hold a relevant interest in the same land where the works happen, a landlord and tenant for instance, or because they are part of the same corporate group. They notify you in the same way, and once they have, you charge VAT as normal. A customer who has notified you once does not need to reissue it if they later switch between the two.

The direction of travel is what to build your paperwork around, because the reverse charge is the default and silence does not displace it. HMRC puts the burden on you to apply the charge anyway: "If you're a supplier, and you believe your customer is an end user but they have not notified you in writing, you should still apply the reverse charge rather than charge VAT under normal rules." So the question belongs in your new client form, and the answer belongs on file with the contract. A declaration made verbally on site is not a declaration.

On asking in the first place, HMRC is equally direct. Its instruction to suppliers is to "ask the customer whether they're registered for VAT and Construction Industry Scheme and whether or not they're an end user". Two boxes on an onboarding form and one filed email covers it for the life of the relationship.

There is also a de minimis worth knowing, and it is a contract-level test rather than an invoice-level one. HMRC: "The 5% disregard only applies where both the supplier and customer (sub-contractor and contractor) agree, from the start of the contract, that it should apply on the basis of the overall contract values... The 5% should not be calculated on an invoice by invoice basis." So if the reverse-charge element is 5% or less of the whole contract and you both agreed that at the outset, normal VAT rules run across the lot. Agreeing it halfway through, or applying it to one invoice that happened to come in light, does not work.

Materials: CIS takes them out, the reverse charge does not

Two schemes with almost identical trigger conditions treat the same £3,600 of timber in opposite ways, and this is the asymmetry worth learning once.

CIS excludes materials. Section 61(1) of the Finance Act 2004 applies the deduction to "so much of the payment as is not shown to represent the direct cost to the sub-contractor of materials used or to be used in carrying out the construction operations". HMRC's instruction to contractors in CIS 340 is to take off, before applying the percentage, "the amount the subcontractor actually paid for the following items used in the construction operations, including VAT paid if the subcontractor is not registered for VAT: materials". Read that clause twice: a VAT registered subcontractor takes materials out at their VAT-exclusive cost, an unregistered one at the VAT-inclusive cost they actually paid.

The reverse charge includes them. HMRC's technical guide puts it in two sentences: "If goods are supplied with construction services this is a single supply for VAT purposes. The reverse charge applies to the full value of the invoice."

Splitting the invoice does not change that. Supply and fix on one order is one supply, whether you write it on one document or two, and both documents carry the reverse charge treatment. HMRC adds the reason the two answers can differ at all: "The single supply concept applies only in relation to VAT and not to the Construction Industry Scheme." The reverse charge follows the supply. CIS follows the money, line by line.

So on the same job, the same materials line does two different things:

Get the first column wrong and £720 of your cash leaves for months. Get the second column wrong and you have either charged VAT you should not have charged or omitted VAT the other side had to account for. They are worth checking as two separate questions on the same invoice, because the answers point opposite ways.

A worked invoice

Second fix carpentry on a housing scheme, 14 to 25 September 2026. You are VAT registered and CIS registered at the net 20% rate. Your customer is a VAT and CIS registered main contractor who has made no end user declaration. Standard rated work. Every condition is met, so the reverse charge applies.

At the foot of the invoice: Reverse charge: VAT Act 1994 Section 55A applies. Customer to pay the VAT to HMRC.

The main contractor's payment and deduction statement then works on a different base:

Two numbers to sit with. The reverse charge worked on £12,000. The CIS deduction worked on £8,400. And the VAT column on that statement is nil from top to bottom, because there was no VAT in the payment for anyone to deduct from.

The 20% in that statement is the registered rate. Unregistered, the same £8,400 attracts 30%, which is £2,520 rather than £1,680, and £840 more of your money is with HMRC until you file. That registration is a ten minute job.

Run the same invoice under the pre-2021 rules and £14,400 was invoiced, £1,680 came off, and £12,720 hit the bank. £2,400 of it belonged to HMRC and was going to leave again, but it left later. The cash difference on this one invoice, on the day, is £2,400.

Meanwhile you paid the merchant £720 of VAT on the £3,600 of materials. That £720 is yours to reclaim, and how soon you see it is the part you control. The arithmetic on a specific job, including the split, is quicker in the CIS deduction calculator.

What happened to your cash flow

Under the old rules the VAT you collected was HMRC's money from the moment it arrived, and it was in your account for a long time first. An invoice paid on 6 January 2026, in a VAT quarter ending 31 March 2026, is paid over on 7 May 2026. That is 121 days.

Collected steadily across a quarter and paid over on the seventh of the second month after it closes, output VAT averaged roughly two months resident in the account. For a subcontractor doing standard rated work that looked like this:

That third column is two twelfths of the second. It was borrowed working capital with a fixed repayment date, and on 1 March 2021 it was withdrawn in a single step. Businesses that had been pricing and paying wages against a bank balance carrying it felt the change as a squeeze that had no obvious cause on any job.

The other side of the change runs the same way but in your favour, and it is the part worth acting on. You collect no output VAT and you still pay input VAT on every merchant run, so you sit in a permanent repayment position. On £250,000 of turnover with £75,000 of materials through it, that is £15,000 a year of VAT you pay out and get back.

Monthly returns are the answer HMRC gives

HMRC states the consequence and the remedy in the same breath: "The reverse charge may also mean your business will make net repayment claims to HMRC, as you will not receive VAT on payments from your customers. You can apply to move to monthly returns using your online VAT account."

The arithmetic on why that is worth doing is straightforward. Spend spread evenly across a three month period sits, on average, 45 days before the return period even closes. Spread across a one month period it sits 15 days. Everything after that point, the filing and the repayment run, is the same either way. Monthly returns therefore pull your input VAT forward by about a month, on average, every month.

On the £15,000 a year figure above, that is £1,250 of your own money arriving a month earlier, twelve times a year, for the cost of a change on your VAT account and the discipline of a monthly filing. If you are already keeping digital records under Making Tax Digital, the marginal effort of monthly is small and the return on it is immediate.

The Flat Rate Scheme stops adding up

The Flat Rate Scheme is open to businesses with VAT turnover of £150,000 or less excluding VAT. You charge VAT normally, pay HMRC a flat percentage of your gross takings, and give up reclaiming input VAT on most purchases. Construction has three published rates:

The scheme paid because the gap between the 20% you collected and the flat percentage you paid over was yours to keep. On £100,000 net of labour-only work, you collected £120,000 gross, paid over 14.5% of it, which is £17,400, against the £20,000 collected, and kept £2,600.

The reverse charge removes the input to that calculation. Reverse-charge supplies come out of the flat rate turnover entirely, and HMRC's rule on the receiving side is the same: "Reverse charge supplies are not to be accounted for under the scheme. Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC and recover it at the same time on the same VAT Return."

So for a subcontractor whose work is mostly business to business, the sum becomes: no VAT collected on the reverse-charge sales, therefore no margin between collected and paid over, therefore nothing kept. What survives is the part of the scheme that costs you, which is the block on reclaiming input VAT on the materials you are still buying at 20%.

Put concrete figures on it. Turnover £84,000, of which £70,000 is reverse-charge work for main contractors and £14,000 is direct work for householders, with £3,900 of input VAT on materials across the year.

A £2,696 swing on a business of that size, in the same year, on the same work. That is a sum worth putting in front of your accountant on a single sheet, because it is arithmetic rather than opinion and it settles in ten minutes. When and how to make the change sits in the VAT registration guide.

Cash accounting goes the same way

If you were using the VAT Cash Accounting Scheme to account for VAT when you were paid rather than when you invoiced, HMRC excludes reverse-charge work from it: "You cannot use the VAT Cash Accounting Scheme for supplies or services you buy or sell that are subject to the reverse charge." The scheme carries on for everything else you do.

For a subcontractor that matters less than it sounds, because the reason cash accounting was attractive was to avoid paying over output VAT on an invoice a main contractor had not settled. Under the reverse charge there is no output VAT on that invoice to pay over. The exposure the scheme was protecting you against left with it.

What it costs

There is no monthly subscription. The platform fee is 2.5% of each invoice processed through AEC Stack, taken when the invoice is paid, so a quiet month costs nothing. The s55A wording, the end user status you hold against each customer, and the materials split that keeps CIS off the £3,600 are stamped onto the invoice as you raise it, which is the point at which getting them right is free.

Open the invoice builder, put in a job with a labour line and a materials line, and watch which of the two the reverse charge picks up and which one CIS leaves alone.