When the VAT reverse charge applies to construction, per Notice 735

Since March 2021 many construction firms cannot simply add VAT to an invoice. The VAT domestic reverse charge shifts the job of accounting for VAT from the supplier to the customer, and it applies to a defined slice of construction work. The exhibit above works HMRC VAT Notice 735^[1] into a five-gate decision tree, because a supplier has to run every test before deciding whether to charge VAT at all.

The five tests, in order: the services must be within the scope of the Construction Industry Scheme (CIS); both parties must be VAT-registered in the UK; both must be CIS-registered; the supply must be standard-rated (20%) or reduced-rated (5%), not zero-rated; and the customer must not be an end user or an intermediary supplier. A single "no" at any gate takes the supply out of the reverse charge, and the supplier charges VAT in the usual way. When every gate is "yes", the supplier issues an invoice showing no VAT, states that the reverse charge applies, and shows the VAT the customer must account for.

The last gate is where most errors happen, so the definitions matter. An end user buys the construction service for its own use rather than to sell it on, typically the building owner or a landlord. An intermediary is connected to, or on the same site as, an end user and re-supplies the service. Both must tell the supplier in writing that they are an end user or intermediary; if they do not, the supplier must assume the reverse charge applies. This written notification is the practical trigger that flips a supply out of the charge.

Two more rules keep the decision clean. Where an invoice mixes reverse-charge and normal work, the whole invoice follows the reverse charge once any reverse-charge element is present, unless that element is 5% or less of the value. And zero-rated construction, most importantly new-build residential housing, is excluded entirely. This exhibit simplifies Notice 735 for the common subcontractor-to-contractor case; mixed supplies, employment businesses supplying staff, and materials-only supplies each have their own treatment, so check the full Notice^[1] for edge cases.