VATREVCON41000 - Compliance issues: Compliance checks
Source: gov.uk (2025-04-02)


If a supplier charges VAT on supplies that should be reverse charged, then the customer should reject the invoice and ask for a credit note or re-invoicing. If a supplier is unsure whether or not the reverse charge should apply because they were genuinely unable to confirm whether or not the customer is required to report payments through the CIS, then they should charge VAT as normal.

If the contractor has to report payments for the supply through the CIS the reverse charge will apply irrespective of whether the subcontractor is registered for the CIS.

If the reverse charge should have been applied but was not, the liability rests with the customer.

If the reverse charge was applied but should not have been, then the liability rests with the supplier.

Failure to register for VAT

In accordance with normal registration rules, a trader who failed to register for VAT at the correct time and made specified supplies coming under the CIS to a VAT-registered trader (i.e. supplies that should have been liable to the construction reverse charge) must be retrospectively registered from their 'effective date of registration' (EDR) - see VATREG25000 (https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg25000). The trader must apply the reverse charge and retrospectively issue reverse charge VAT invoices to their customers from the EDR (charging no VAT but stating the reverse charge applies - read VATREVCON37100 (https://www.gov.uk/hmrc-internal-manuals/vat-reverse-charge-for-building-and-construction-services-manual/vatrevcon37100) for more information on invoicing requirements).

In practice, this means:
- The trader will need to issue a VAT invoice to their customer, charging no VAT but stating that the reverse charge applies. Unless their customer's input tax recovery is restricted (i.e. a partially exempt trader), their customer can make an error correction using Method 1 outlined in Section 4 of VAT Notice 700/45 (https://www.gov.uk/guidance/how-to-correct-vat-errors-and-make-adjustments-or-claims-vat-notice-70045#VAT-errors-submitted) (instead of submitting an Error Correction Notification) as the net value of the reverse charge output and input tax errors is £0. However, if there are other errors to be accounted for in the same prescribed accounting period as the reverse charge errors, or if the customer's input tax recovery is restricted, the customer will need to decide whether a Method 1 or Method 2 error correction is suitable. If they decide to submit a Method 2 error correction (an Error Correction Notification), they will need to account for both the reverse charge input and output tax as part of this ECN.
- Ordinarily a retrospectively registered trader would be able to recover input tax on supplies where they have been charged VAT. However, the retrospectively registered trader cannot recover input tax on reverse charge supplies without also accounting for the output tax at the same time. Therefore no adjustment can be made in respect of such supplies received unless the trader has documentation from their supplier to show that their supplier recovered the output tax they had paid to HMRC and re-invoiced and repaid the trader accordingly.
- If, as per points one and two, the only adjustments to be made by the retrospectively registered trader are nil net adjustments, no assessment need be raised for the prescribed accounting period in question. However, if the retrospectively registered trader needs to be assessed for an output tax error, for example because they have also made non-reverse-charged supplies in the same prescribed accounting period, the reverse charge input and output tax errors should also be include in the assessment.
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