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Updated: Oct 18, 2021

As of the 1st of March, the government has changed the way that VAT is charged within the construction sector. The VAT charges will now be reversed meaning a fundamental difference in the invoices received and raised by sub-contractors.

Firstly, for the scheme to apply then you must be VAT registered and CIS registered. The party receiving the invoice will declare the VAT and hold onto it until they are required to pay it directly to the HMRC at the end of a VAT quarter. The VAT transaction between HMRC and sub-contractor is effectively cut out.

The only situation when this won’t apply is if a sub-contractor is raising an invoice to an ‘End User’ or intermediary supplier, for example a private homeowner (private individual) or someone who is not selling construction services.

If you think this sounds confusing, you’re not alone. We’ve received a number of enquires over the past week from many of our contractor colleagues trying to figure our how to correctly invoice going forwards, and of course, there are a number of grey areas that invoices can fall into. Luckily, the HMRC have provided some flow charts to help us work it out which you can access here.

The purpose of this new process is to address the financial burden that smaller sub-contractors face on a quarterly basis when they receive their VAT bill if they’ve not managed their cash properly. It’s assumed that larger main contractors will be in a better position to account for the VAT they’ll have to pay. This means that a sub-contractor will be cash poorer throughout the quarter but will have a smaller bill to pay at the end and the main contractor will be cash richer throughout the quarter but will have a larger bill to pay at the end.

This also leaves the HMRC less vulnerable to VAT fraud and means there are fewer companies with larger bills to audit if they need to.

The most important part of this process is to establish if you/your company are End Users. If you are then your company should declare it to anyone who regularly raises an invoice to make sure that any invoices you raise are correct. As always, the onus is on those raising invoices to ensure they are correct as opposed to those receiving the invoice.

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