Reverse charge construction e-invoices in Peppol (AE code)

To send a UK construction reverse charge invoice over Peppol, code the lines and the VAT breakdown as AE with a VAT rate of 0 and a VAT amount of 0, give the exemption reason "Reverse charge" (or code VATEX-EU-AE), and include both your VAT number and your customer's. Because the European standard will not let you put 20% in the rate field, HMRC's required wording and the VAT due go in the exemption reason text.

This guide covers when the reverse charge applies, what HMRC says the invoice must show, a validated UBL example, and the errors that fire most often.

When the reverse charge applies

HMRC says the VAT domestic reverse charge "must be used for most supplies of building and construction services". As a supplier you must use it if you are VAT registered in the UK and:

• your customer is registered for VAT in the UK
• payment is reported within the Construction Industry Scheme (CIS)
• the services are standard or reduced rated
• you are not an employment business supplying staff or workers
• your customer has not given written confirmation that they are an end user or intermediary supplier

If any of those fail, normal VAT rules apply and the invoice uses code S instead. HMRC also has a "5% disregard" for supplies where the reverse charge element is 5% or less of the value, which both parties must agree from the start of the contract. All of these are VAT decisions, not e-invoicing ones. Check them against HMRC's technical guide.

What HMRC says the invoice must show

From HMRC's technical guide, a supplier of reverse charge services must:

• show all the information required on a VAT invoice
• "make a note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT"
• "clearly state how much VAT is due under the reverse charge, or if this amount cannot be shown, state the rate of VAT, but do not include the VAT in the amount charged to the customer"

The guide says the invoice must include the reference "reverse charge", and gives examples of acceptable wording: "VAT Act 1994 Section 55A applies", "S55A VATA 94 applies" and "Customer to pay the VAT to HMRC".

What EN 16931 requires for AE

These are the Peppol BIS Billing 3.0 rules (EN 16931 bound to UBL) for reverse charge. All are fatal.

Rule	What it says (shortened)
BR-AE-01	An invoice with an AE line, allowance or charge "shall contain in the VAT Breakdown (BG-23) exactly one VAT category code (BT-118) equal with 'VAT reverse charge'"
BR-AE-02	An AE line needs the Seller VAT identifier (BT-31), tax registration (BT-32) and/or tax representative VAT identifier (BT-63) "and the Buyer VAT identifier (BT-48) and/or the Buyer legal registration identifier (BT-47)"
BR-AE-05	"the Invoiced item VAT rate (BT-152) shall be 0 (zero)"
BR-AE-08	The AE taxable amount must equal the AE line amounts minus AE allowances plus AE charges
BR-AE-09	"The VAT category tax amount (BT-117) … shall be 0 (zero)"
BR-AE-10	The AE breakdown "shall have a VAT exemption reason code (BT-121), meaning 'Reverse charge' or the VAT exemption reason text (BT-120) 'Reverse charge'"

Peppol adds PEPPOL-EN16931-P0107: "Tax Category AE MUST be used when exemption reason code is VATEX-EU-AE".

The tension is clear. HMRC wants the VAT amount or rate visible. EN 16931 makes both the rate and the VAT amount zero. The workable answer today is to keep the structured fields at zero and carry the HMRC wording, rate and amount as text.

A valid UBL example

This invoice is for £4,000 of plastering by a VAT-registered subcontractor to a VAT- and CIS-registered contractor. The customer accounts for £800 of VAT (20%). We checked the full document against the UBL 2.1 schema, the EN 16931 UBL rules and the Peppol BIS Billing 3.0 rules, and it passed with no errors. Parties and payment details are left out here for space.

<cbc:Note>Reverse charge: VAT Act 1994 Section 55A applies. Customer to account to HMRC for VAT of GBP 800.00 (20%).</cbc:Note>
<cbc:DocumentCurrencyCode>GBP</cbc:DocumentCurrencyCode>
<!-- ... seller and buyer both carry a GB VAT number in PartyTaxScheme ... -->
<cac:TaxTotal>
  <cbc:TaxAmount currencyID="GBP">0.00</cbc:TaxAmount>
  <cac:TaxSubtotal>
    <cbc:TaxableAmount currencyID="GBP">4000.00</cbc:TaxableAmount>
    <cbc:TaxAmount currencyID="GBP">0.00</cbc:TaxAmount>
    <cac:TaxCategory>
      <cbc:ID>AE</cbc:ID>
      <cbc:Percent>0</cbc:Percent>
      <cbc:TaxExemptionReasonCode>VATEX-EU-AE</cbc:TaxExemptionReasonCode>
      <cbc:TaxExemptionReason>Reverse charge: S55A VATA 94 applies. Customer to account to HMRC for VAT of GBP 800.00 (20%)</cbc:TaxExemptionReason>
      <cac:TaxScheme><cbc:ID>VAT</cbc:ID></cac:TaxScheme>
    </cac:TaxCategory>
  </cac:TaxSubtotal>
</cac:TaxTotal>
<cac:LegalMonetaryTotal>
  <cbc:LineExtensionAmount currencyID="GBP">4000.00</cbc:LineExtensionAmount>
  <cbc:TaxExclusiveAmount currencyID="GBP">4000.00</cbc:TaxExclusiveAmount>
  <cbc:TaxInclusiveAmount currencyID="GBP">4000.00</cbc:TaxInclusiveAmount>
  <cbc:PayableAmount currencyID="GBP">4000.00</cbc:PayableAmount>
</cac:LegalMonetaryTotal>
<cac:InvoiceLine>
  <cbc:ID>1</cbc:ID>
  <cbc:InvoicedQuantity unitCode="C62">1</cbc:InvoicedQuantity>
  <cbc:LineExtensionAmount currencyID="GBP">4000.00</cbc:LineExtensionAmount>
  <cac:Item>
    <cbc:Name>Plastering works, Unit 4, Phase 2</cbc:Name>
    <cac:ClassifiedTaxCategory>
      <cbc:ID>AE</cbc:ID>
      <cbc:Percent>0</cbc:Percent>
      <cac:TaxScheme><cbc:ID>VAT</cbc:ID></cac:TaxScheme>
    </cac:ClassifiedTaxCategory>
  </cac:Item>
  <cac:Price>
    <cbc:PriceAmount currencyID="GBP">4000.00</cbc:PriceAmount>
  </cac:Price>
</cac:InvoiceLine>

Points to note:

• The amount payable is £4,000. The VAT is not added, as HMRC requires.
• Peppol allows only one document-level cbc:Note (PEPPOL-EN16931-R002), so put all your note text in one.
• The exemption reason text is free text. The validators only check that a code or text is present, so the HMRC wording fits there.

The errors you will see

BR-AE-05. You sent AE with <cbc:Percent>20</cbc:Percent> on the line. Set it to 0 and move the 20% into text.

BR-AE-02. The buyer party has no VAT identifier. Add the contractor's VAT number with its GB prefix in cac:AccountingCustomerParty/cac:Party/cac:PartyTaxScheme/cbc:CompanyID. A missing GB prefix triggers BR-CO-09 instead.

BR-AE-10. The AE breakdown has no reason. Add VATEX-EU-AE, the text, or both.

BR-AE-09, BR-CO-17 or BR-CO-14. Your system calculated 20% VAT and put it in the totals. In our tests, £800 in the AE breakdown triggered BR-AE-09 and BR-CO-17. £800 only in the header cac:TaxTotal/cbc:TaxAmount triggered BR-CO-14. For AE, both must be 0.00, and the VAT-inclusive total equals the net total.

BR-AE-01. The invoice has AE lines but no AE breakdown, or two of them. There must be exactly one.

Mixed invoices and credit notes

An invoice can carry both AE and S lines. For example, where the 5% disregard does not apply and some items fall outside the reverse charge. Each code then gets its own breakdown. Whether that split is right for VAT is an HMRC question, not a validation one.

For credit notes, HMRC's guide says to note on the credit note "that the reverse charge applies" and show "the reduction in the VAT the customer has to pay to HMRC", for example "reverse charge: customer to account for the output tax adjustment of £X to HMRC". In a Peppol credit note, use the same AE coding and put that wording in the exemption reason text. See credit notes in Peppol.

CIS deductions are separate

The reverse charge is VAT. CIS deductions are income tax withheld by the contractor. Peppol BIS Billing 3.0 has no dedicated CIS deduction field, and how CIS will be shown on UK e-invoices is not yet confirmed. Read e-invoicing in construction and CIS.

What the mandate may change

Everything above follows Peppol BIS Billing 3.0 as it stands. The UK data standard has not been published, and the government has said it is weighing an existing standard against a UK-specific one. A UK specification could add a structured way to show reverse charge VAT. Until then, treat the approach above as current Peppol practice, not confirmed UK mandate rules.

What to do now

• Check your software can produce AE lines with rate 0 and a VAT amount in text.
• Make sure contractor records hold a valid UK VAT number.
• Keep end user and intermediary notifications on file. They decide whether you use AE or S.
• Test a reverse charge invoice and a reverse charge credit note through your Access Point before you need them.