VAT on contractor invoices: what you need to know

This is general guidance, not tax advice. VAT has many special cases, so check HMRC's guidance or speak to an accountant about your situation.

Do you need to be VAT registered?

GOV.UK says you must register for VAT if either:

• your total taxable turnover for the last 12 months goes over £90,000 (the VAT threshold); or
• you expect your taxable turnover to go over £90,000 in the next 30 days.

It's a rolling 12-month test, not your tax year, so check it every month if you're getting close. You must register within 30 days of the end of the month in which you went over. You can also register voluntarily below the threshold. Some contractors do, especially if their customers are VAT registered and can reclaim the VAT.

A day-rate example: £180 a day, 5 days a week for 48 weeks is £43,200, comfortably under the threshold. At £400 a day on the same pattern, you'd reach £96,000 and would need to register.

If you're not VAT registered

• Don't charge VAT and don't show "VAT" lines on your invoice.
• Don't show a VAT number. You don't have one.
• Your total is simply what you're charging.

Adding VAT when you're not registered is a serious mistake. You'd be collecting money you aren't entitled to.

What changes once you're registered

When you supply standard or reduced-rated services to another VAT-registered business, HMRC says you must give them a VAT invoice. HMRC's VAT guide (Notice 700, section 16) lists what a full VAT invoice must show, including:

• a unique sequential invoice number
• the time of supply (tax point) and the date of issue
• your name, address and VAT registration number
• the customer's name and address
• a description of the services, with the quantity and the unit price
• the rate of VAT for each item, and the total excluding VAT
• the total VAT charged

The standard rate is currently 20% (see GOV.UK's VAT rates page). So £825 of labour becomes £825 + £165 VAT = £990 payable. Check HMRC's notice for the complete list and the rules for simplified invoices.

Tax point: why invoice dates matter

For services, the basic tax point is usually when the work is completed. If you issue a VAT invoice within 14 days afterwards, the invoice date normally becomes the tax point. The tax point decides which VAT return the VAT belongs to, which is another reason to invoice promptly and date invoices accurately.

The construction reverse charge

If you work in construction under CIS, the VAT domestic reverse charge usually applies to supplies between two VAT-registered businesses. GOV.UK says it applies to standard and reduced-rate construction services reported within the Construction Industry Scheme. Under the reverse charge:

• you still issue a VAT invoice and show the VAT that would be due (or the rate);
• you state that the reverse charge applies, e.g. "Reverse charge: customer to pay the VAT to HMRC";
• you don't add the VAT to the amount the customer pays you; and
• the customer accounts for the VAT on their own VAT return.

It doesn't apply when you're working for an end user (for example a homeowner, or a business that isn't selling on the construction services), or for services that aren't covered (GOV.UK lists exclusions such as architects' and surveyors' professional work, and installing security systems). Supplies of workers by employment businesses are also excluded. Read HMRC's reverse charge guidance before using it.

VAT and CIS deductions

CIS deductions are never taken from VAT. When a contractor works out your CIS deduction, VAT is excluded first, along with materials you paid for. See our CIS invoice guide.

Flat Rate Scheme

Some small businesses use the VAT Flat Rate Scheme, where you pay HMRC a fixed percentage of your VAT-inclusive turnover instead of the difference between VAT charged and VAT paid. Your invoices still show VAT at the normal rate. Whether it's worthwhile depends on your sector and costs, and labour-only businesses with low costs may be "limited cost traders". This is one to discuss with an accountant.

Common VAT invoicing mistakes

• Charging VAT before your registration date.
• Forgetting your VAT number on VAT invoices.
• Adding VAT to the amount payable when the reverse charge applies.
• Using the reverse charge for an end user (such as a homeowner) when normal VAT applies.
• Rounding the VAT per line inconsistently. Pick one method and stick to it.