What the reverse charge is
Under normal VAT rules the supplier charges VAT, collects it from the customer and pays it to HMRC. Under the domestic reverse charge (DRC) for construction, the supplier doesn't charge VAT. The customer accounts for both the output VAT (as if they'd charged it themselves) and the input VAT (as if they'd paid it) on their own return. For the customer it's usually a nil net entry. For the supplier it means no VAT on the invoice and no VAT to pay over.
HMRC introduced it to stop "missing trader" fraud, where a subcontractor charged VAT, collected it, and disappeared before paying it. It applies to the supply chain below the end user: contractor to contractor, subcontractor to contractor, and so on down.
When it applies: all five must be true
- The supply is of construction services within the scope of CIS (building, alteration, repair, demolition, installation of heating, lighting, power, water and ventilation systems, painting and decorating, and similar).
- Both you and the customer are VAT registered.
- Both you and the customer are CIS registered.
- The supply is standard or reduced rated. Zero-rated supplies (most new residential build) are outside the DRC.
- The customer has not confirmed in writing that they are an end user or intermediary supplier.
If any one of those is false, charge VAT in the normal way.
End users and intermediaries
An end user is a customer who receives construction services but doesn't make onward supplies of them: a homeowner, a landlord occupying their own building, a retailer having their shop fitted, a developer who will sell or let the finished property rather than supply construction services. An intermediary supplier is a VAT-registered business connected to an end user (same corporate group, or landlord and tenant) that buys construction services to pass on.
Both must be charged VAT normally, but, and this is the part most contractors miss, only if they've told you in writing. If they haven't confirmed end-user status and the other four conditions are met, the reverse charge applies. The onus is on them to tell you, and on you to ask and keep the answer.
What the invoice must say
A reverse charge invoice shows no VAT in the total. It must state that the reverse charge applies and that the customer must account for the VAT, and show the VAT rate or amount that would have applied. HMRC accepts wording such as "Reverse charge: customer to pay the VAT to HMRC" with the figure shown. Your accounting software needs a reverse charge tax rate set up; Xero and most others have one.
Worked examples
| Scenario | Reverse charge? | Why |
|---|---|---|
| Electrical subcontractor invoices a main contractor for first and second fix on a commercial unit | Yes | CIS services, both registered, standard rated, contractor is not the end user |
| Same subcontractor invoices a homeowner for a rewire | No | Homeowner is not VAT registered and is an end user |
| Groundworker invoices a housebuilder for foundations on new dwellings | No | Zero-rated new residential build is outside the DRC |
| Roofer invoices a landlord for repairs to a block the landlord owns and lets | Depends | If the landlord is VAT and CIS registered and hasn't confirmed end-user status, yes. Most landlords are end users and should confirm in writing, in which case charge VAT |
| Scaffolder supplies and erects scaffolding for a contractor | Yes | Labour to erect and dismantle is within CIS, so the whole supply falls under the DRC |
| Materials-only supply to a contractor, no labour | No | Materials alone are outside CIS, so outside the DRC |
The mistakes we see most
- Charging VAT to a contractor who should have been reverse charged. The invoice is rejected, you re-issue, and you're paid six weeks late.
- Reverse charging an end user who never told you. Technically correct if they never confirmed, but now neither party has accounted for VAT properly. Ask every customer once, in writing, and keep the reply on file.
- Applying the DRC to a mixed supply wrongly. If any part of a supply is within CIS, the whole supply is reverse charged (the "5% disregard" rule only lets you ignore the reverse charge where the CIS element is 5% or less of the total).
- Staying on quarterly VAT returns while in permanent repayment. If most of your sales are reverse charged and your purchases carry VAT, you're owed money every quarter. Monthly returns get it back twelve times a year instead of four.
The cash flow effect
Before 2021, a subcontractor invoicing £100k plus VAT held £20k of VAT for up to four months before paying it to HMRC. That was a working-capital cushion, and the DRC removed it overnight. It's one reason the 13-week cash forecast matters more than it used to: the float is gone, and the gap between paying labour weekly and being paid on certification is now funded entirely by you.
A checklist for your top ten customers
For each: are they VAT registered (check the number)? CIS registered (verify)? Have they confirmed end-user status in writing? Are you invoicing them correctly today? Do the same for your top ten suppliers in reverse, and look for purchase invoices charging VAT that should have been reverse charged; those need credit notes.
Sources
- HMRC: VAT domestic reverse charge technical guide
- HMRC: VAT reverse charge for building and construction services
Questions people ask
Does the reverse charge apply to zero-rated work?
No. The DRC applies only to standard and reduced-rated supplies. Zero-rated supplies, such as most construction of new dwellings, are invoiced at 0% in the normal way.
What if the customer refuses to say whether they're an end user?
If they don't confirm end-user status in writing and the other conditions are met, apply the reverse charge. Keep a record of having asked. The responsibility to notify sits with the customer.
Can I use the flat rate scheme with the reverse charge?
Reverse charge sales are excluded from flat rate turnover, which usually makes the scheme unattractive for construction businesses. Most leave it; check with your accountant.
Does the reverse charge affect CIS deductions?
No. CIS deductions are calculated on the labour element as before. The DRC only changes who accounts for the VAT.
About the author. Chris Neuman is the founder of Taxtful, accountants and advisers to UK construction companies turning over £1m to £15m. Taxtful is construction-only: every client, every template, every conversation. This article is general guidance, not advice on your circumstances; rates and rules change, so check the current position before acting.