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Where the construction reverse charge applies, the supplier of the services does not charge VAT, and the liability to account for the VAT shifts from the supplier to the customer. The customer does not pay any VAT to the supplier, but accounts for it as output VAT in box 1 of their return, and can also generally recover it as input VAT in box 4 of their return (subject to normal VAT recovery rules). This produces the same net result as if the customer had paid VAT to the supplier, the supplier had accounted for the output VAT, and the customer had recovered the input VAT.

Example 1

A VAT registered subcontractor makes a supply of the installation in a building of a ventilation system for a VAT-exclusive value of £10,000 to a contractor. The subcontractor does not charge VAT on the supply (£2,000), specifying on its invoice that the reverse charge applies.

The contractor will account for the subcontractor’s output tax (£2,000) but will also reclaim the same amount as input tax, thus producing a nil net effect. The contractor then supplies the services on to a private domestic customer, charging VAT on the supply as normal.

Example 2

A subcontractor (SC1) makes a supply of construction services in relation to the construction of a sewer to another subcontractor (SC2) for a VAT-exclusive value of £50,000. SC1 specifies on its invoice that the reverse charge applies and so the VAT(£10,000) is not payable to it.

SC2 will account for SC1’s output tax (£10,000) but will reclaim the same amount as input tax (subject to normal rules), thus producing a nil net effect. SC2 now makes an onward supply of the same service to another subcontractor (SC3) for a VAT-exclusive value of £60,000. SC2 does not charge VAT on the supply (£12,000), specifying on its invoice that the reverse charge applies.

SC3 will account for SC2’s output tax (£12,000) but will reclaim the same amount as input tax, thus producing a nil net effect. SC3 now makes an onward supply of the same service to another subcontractor (SC4) for a VAT-exclusive value of £70,000. SC4 does not charge VAT on the supply (£14,000), specifying on its invoice that the reverse charge applies.

SC4 will account for SC3’s output tax (£14,000) but will reclaim the same amount as input tax, thus producing a nil net effect. SC4 now makes an onward supply of the same service to a local authority who has notified SC4 in writing that it is an end user (see VATREVCON33100) for a VAT-exclusive value of £80,000, charging £16,000 on the supply. The end user (the local authority) pays SC4 a VAT-inclusive total of £96,000. SC4 accounts for £16,000 output tax, in addition to the £14,000 of output tax on SC3’s supply, and the end user (the local authority) reclaims the £16,000 of input tax as normal.

If we look at how this would translate onto the VAT returns we have:

	SC1	SC2	SC3	SC4	End User
Output Tax (box 1)*	£0	£10,000	£12,000	£30,000	£0
Input Tax (box 4)*	£0	£10,000	£12,000	£14,000	£16,000
Net Tax Due (box 5)	£0	£0	£0	£16,000	-£16,000
Outputs (box 6)	£50,000	£60,000	£70,000	£80,000	£0
Inputs (box 7)	£0	£50,000	£60,000	£70,000	£80,000

* The above assumes that SC1 made no purchases and SC2-4 and the end user made no other purchases or supplies.

Note that the reverse charge procedure has no impact on the completion of boxes 6 (outputs) and 7 (inputs) of the VAT return. The only difference in the completion of the VAT return is that, for each transaction, the amount that would ordinarily go in the supplier's box 1 goes in the customer's box 1 instead.