On a UK construction supply between two VAT-registered businesses under the Construction Industry Scheme, the subcontractor does not charge VAT at all — the customer accounts for it to HMRC instead. Get it wrong in either direction and you either over-charge VAT the customer cannot reclaim, or omit the mandatory wording HMRC now actively enforces. ERPNext has no built-in CIS logic, so you construct it: a pair of reverse-charge tax templates, the exact invoice narrative, and a classification gate that decides, per contract, whether the charge even applies.
Running a UK entity alongside another country?
If your UK construction arm sits inside a multi-country ERPNext setup, the multi-currency and multi-company setup guide covers keeping the VAT logic scoped to the right company.
The domestic reverse charge is the rare tax rule where the safe-looking move — charging VAT anyway — is the actual error, and HMRC is now looking for it. I am Manoj, ERPNext and Frappe implementation lead at Mith Tech in Bengaluru, and we build this for UK construction clients as a template-and-gate pattern rather than waiting for a localisation that does not exist.
Does the reverse charge even apply?
The charge is not a customer-level setting — it is decided per supply, and all four gates must hold. The most common exit is the end-user rule: if the customer occupies or owns the building and confirms end-user status in writing, normal VAT applies.
Answer the four HMRC gates — CIS supply, VAT-rated, both parties VAT-registered, customer not an end user — to see whether the domestic reverse charge applies or normal VAT does.
Answer all four gates to classify the supply.
Reflects HMRC VAT domestic reverse charge for construction (VAT Act 1994 s55A / VAT Notice 735), in force since 1 Mar 2021, current as of 2026-07-31. Confirm the classification per contract with your accountant.
End-user status is a written confirmation, not an assumption
A customer is an end user when they receive construction services but do not make onward construction supplies — typically the building's owner or occupier. HMRC expects that status to be confirmed in writing. Absent that confirmation, the default is the reverse charge, not normal VAT. Treating a supply as normal VAT on an assumption is exactly the kind of thing the current enforcement drive catches.
How the entries actually work
The mechanic is what makes ERPNext setup non-obvious, because the seller and buyer sides look nothing alike:
- Subcontractor (seller): invoices with no VAT charged. The invoice states the VAT rate and amount the customer will self-account for, and carries the mandatory narrative.
- Contractor (buyer): on the same supply records both output VAT (as if they had charged themselves) and input VAT (reclaiming it) at the applicable rate. The net effect on the VAT return is nil, but both the output and input boxes are populated — a reverse charge that fills only one box is wrong even though the total looks right.
Where the VAT rule meets the accounting record
The reverse charge does not change revenue or cost recognition — the subcontractor still recognises the full contract value as revenue under the normal accounting standard; only the VAT treatment differs. What changes is the VAT return presentation: nil net, non-nil gross, in specific boxes. Keep the two separate in your head — the ledger records the supply at its value; the VAT return records who accounts for the tax. Confirm the return-box mapping with your accountant, as the boxes are what HMRC reconciles against.
The mandatory invoice wording
HMRC does not mandate one exact sentence, but the invoice must make clear the reverse charge applies and show the VAT the customer must account for. It accepts several forms — and rejects the two things people do wrong.
Tap the wording on your invoice to see whether it satisfies HMRC's reverse-charge requirement or is non-compliant.
Tap the wording on your invoice. HMRC requires the invoice to make clear the reverse charge applies and to show the VAT the customer must account for — it accepts several forms.
Whichever form you use, the invoice must also show the VAT rate and amount the customer will self-account for. Confirm against current HMRC guidance.
The two failures are equally common: printing no reverse-charge wording at all, and — the worse one — charging VAT at 20% on a standard invoice as if the reverse charge didn't apply. The second isn't just a wording defect; it puts real VAT on the invoice that the customer cannot reclaim, because it should never have been charged.
Build it in ERPNext
Copy-paste the reverse-charge sales and purchase tax templates, the Print Format narrative block, the validate-hook classification gate, and the habits HMRC's enforcement targets.
ERPNext has no native CIS logic — construct it from tax templates. The seller side charges no VAT; the buyer side self-accounts.
SELLER (subcontractor) — Item/Sales Taxes Template:
• "UK CIS Reverse Charge (Sales)"
• VAT line at 0% output — you charge NO VAT
• Companion note field drives the print narrative
BUYER (contractor) — Purchase Taxes Template:
• "UK CIS Reverse Charge (Purchase)"
• One line: + output VAT at the applicable rate
• One line: - input VAT at the same rate
• Net effect on the VAT return: nil, but BOTH the
output and input boxes are populated
Assign the reverse-charge template to CIS supplies so
the entries are automatic, not hand-keyed per invoice.Classify the supply
Walk the four gates for the specific contract. Because the same customer can be an end user on one job and not on another, this is a per-supply decision, not a customer flag. Store the end-user confirmation where the invoice logic can see it.
Build the two templates
A sales tax template that charges no VAT for the subcontractor side, and a purchase tax template that posts both output and input VAT for the contractor side. Assign the reverse-charge template to qualifying CIS supplies so the entries are automatic — hand-keying VAT lines per invoice is where errors creep in.
Render the narrative automatically
Add a conditional Print Format block that prints the reverse-charge wording and the VAT the customer must account for whenever the reverse-charge template is used. Lock it in so a qualifying invoice can never print without it — the same template-review discipline that keeps an IRN and QR on every Indian e-invoice applies here to the narrative.
Gate the classification
Add a validate hook: when the four conditions hold, require the reverse-charge template and throw if a normal-VAT one is set; otherwise require normal VAT and throw if the reverse-charge one is set. Default to the reverse charge when end-user status is unconfirmed. That single gate prevents both the missing-narrative and the wrongly-charged-VAT errors.
When sales quotes the job and finance invoices it
The person who wins the job and sets it up in ERPNext is in sales or estimating; the person who raises the invoice is in finance. The classification lives between them: whether the customer is an end user, whether they're VAT-registered, whether the supply is under CIS. If that isn't captured at contract setup, finance is left guessing at invoice time — and the safe-feeling guess (charge VAT) is the wrong one.
The fix is to make classification a setup step, not an invoicing decision. Capture the four gates and the written end-user confirmation when the job is created, drive the template selection from them, and let the validate gate enforce it. Finance then invoices from a decision already made and evidenced, rather than re-deciding under time pressure.
Draft policy for your commercial and finance leads to ratify. Every UK construction contract records, at setup, whether the four reverse-charge conditions hold, with the customer's end-user or intermediary-supplier status confirmed in writing where claimed. Invoices are raised from the template the classification selects; the validate gate refuses a mismatched template. No VAT is charged on a reverse-charge supply, and no reverse-charge invoice prints without the mandatory narrative and the VAT the customer must account for. Where end-user status is unconfirmed, the reverse charge is the default. Confirm the classification and return-box treatment with your accountant before this enters an SOP.
Reverse charge, or normal VAT
FAQ
+Who pays the VAT under the CIS reverse charge?
The customer (the contractor) accounts for the VAT to HMRC, not the subcontractor. The subcontractor charges no VAT on the invoice; the customer records both output and input VAT on the same return, netting to nil. This applies to CIS supplies between UK VAT-registered businesses where the customer is not an end user.
+What wording must a reverse-charge invoice show?
The invoice must make clear the reverse charge applies and show the VAT the customer must account for. HMRC accepts forms such as "Reverse charge: Customer to pay the VAT to HMRC" or "Reverse charge: VAT Act 1994 Section 55A applies". Whichever you use, it must appear alongside the VAT rate and amount the customer will self-account for.
+Does ERPNext support the UK CIS reverse charge out of the box?
No. ERPNext has no native Construction Industry Scheme or domestic-reverse-charge logic. You build it: a sales tax template that charges no VAT, a purchase tax template that posts both output and input VAT, a Print Format narrative block, and a validate hook that gates the classification per supply.
+What happens if I charge VAT by mistake on a reverse-charge supply?
You have put VAT on the invoice that should not be there, and the customer cannot reclaim it because it was wrongly charged. It is a specific error HMRC's current enforcement targets. The fix is to reissue the invoice correctly with no VAT and the reverse-charge narrative — do not leave the wrong VAT on the record.
+Is the CIS reverse charge still in force in 2026?
Yes. The VAT domestic reverse charge for building and construction services has been in force since 1 March 2021 under VAT Act 1994 s55A, set out in VAT Notice 735, and remains in force as of 31 July 2026 — with HMRC increasing enforcement activity. Confirm the current guidance for your specific supplies.
+How do I know if my customer is an end user?
An end user receives the construction services but does not make onward construction supplies — usually the owner or occupier of the building. HMRC expects this to be confirmed in writing. Without a written confirmation, treat the supply as reverse-charge by default; do not assume end-user status to justify charging normal VAT.
Related issues you may also hit
- ERPNext multi-currency and multi-company setup — scoping UK VAT logic to the right company.
- ERPNext for trading businesses — tax-template patterns beyond construction.
- Choosing an implementation partner who can build compliance logic ERPNext doesn't ship.
Closing
The domestic reverse charge is a rule where the intuitive move is the wrong one, and HMRC is now enforcing accordingly. Classify each supply against the four gates, build the seller and buyer templates once, and gate the template selection so finance invoices from a decision that's already evidenced. Do that and the reverse charge becomes a template that fires itself — not a judgement call made under pressure and caught at audit.
UK construction billing and not sure the VAT reverse charge is set up right?
We build the CIS reverse-charge templates, the mandatory narrative, and the classification gate in ERPNext, so every construction invoice is compliant by construction rather than by memory.