The VAT Reverse Charge for Construction

The domestic reverse charge for construction is a VAT rule that changes who hands the VAT to HMRC. Normally a subcontractor adds VAT to its invoice, collects it from the customer, and pays it over. Under the reverse charge the subcontractor charges no VAT at all, and the customer receiving the work accounts for that VAT directly instead. It has applied since 1 March 2021 to building work that is reported under the Construction Industry Scheme, and it is one of the biggest VAT changes the building trade has seen.

This guide explains it in plain English: what the reverse charge is and why it exists, when it applies and when it does not, how to word your invoices, how each side records the figures, and the cash flow effect that caught many subcontractors out. If you need the VAT figure on a job before you raise the paperwork, our free calculator works it out in seconds.

What is the domestic reverse charge?

With most sales the supplier is the one who charges VAT, holds it for a while, and then pays it to HMRC on the next return. The reverse charge turns that around for certain construction work. The subcontractor doing the job leaves VAT off the invoice, and the customer, usually the main contractor, records that VAT on their own return as if they had charged it to themselves. On the same return they reclaim it as input tax under the normal rules, so for a fully taxable business the two entries cancel out and no money actually moves for the VAT.

The reason for the rule is fraud. In a long chain of builders it was possible for one firm to charge VAT, take the cash from its customer, and then vanish before paying HMRC. This was known as missing trader fraud. By moving the VAT accounting to the customer, HMRC removed the chance for that VAT to go missing partway down the chain, because the party who reclaims it is also the party who declares it.

When does the reverse charge apply?

The reverse charge is not optional and it is not a matter of judgement. It applies whenever all of the following are true for a supply of construction services.

The five conditions

• Both the supplier and the customer are registered for VAT in the UK.
• The payment for the work is reported under the Construction Industry Scheme.
• The work is standard rated at 20% or reduced rated at 5%.
• The customer is not an end user or an intermediary supplier.
• The service is one of the specified construction services, rather than one of the excluded ones listed further down.

Which services are covered

Value makes no difference. A small repair worth a few hundred pounds follows exactly the same rule as a contract worth millions, so there is no minimum job size to worry about. The services covered are broad and include building, altering, repairing, extending and demolishing structures, groundworks and civil engineering, installing heating, lighting, power, water and drainage, painting and decorating, and preparatory work such as site clearance and scaffolding.

End users and intermediary suppliers

What counts as an end user

The most important exception is the end user. An end user is a business that is registered for VAT and the Construction Industry Scheme but does not sell the construction work on to anyone else. A property company having its own offices refurbished, or a retailer fitting out its own shop, is an end user because the building work is used by the business rather than resold. Supplies to an end user stay outside the reverse charge, so the supplier charges VAT in the normal way.

Intermediary suppliers

Intermediary suppliers are treated in the same way. These are businesses that are connected to an end user, either because they share an interest in the same land where the work happens or because they belong to the same corporate group, and they buy the work and pass it on within that group. Because the work is staying inside the group rather than being sold on in the trade, they are handled like end users.

How to invoice under the reverse charge

When the reverse charge applies, the supplier raises an invoice that leaves the VAT off the total but still makes the VAT position clear. The invoice needs to state that the reverse charge applies and that the customer is the one who must account for the VAT to HMRC. It should also show the rate or the amount of VAT that the customer needs to deal with, even though that amount is not added to the sum being paid.

Wording HMRC accepts

HMRC does not fix the exact words in law, but the line has to show two things at once: that the reverse charge applies, and that the customer is the one who must account for the VAT. The examples HMRC publishes are “Reverse charge: VAT Act 1994 Section 55A applies”, “Reverse charge: S55A VATA 94 applies”, and “Reverse charge: Customer to pay the VAT to HMRC”. Two words on their own will not do, because “reverse charge” by itself never tells the customer to account for the tax. Put the line on the face of the invoice where it will be read, not buried in the terms on the back.

A worked example

Take a subcontractor billing £4,000 of labour on a standard rated job for a main contractor. Under the old rules the invoice would have come to £4,800. Under the reverse charge it looks like this.

The £800 appears on the invoice for information only. The customer pays £4,000, not £4,800, and then puts that £800 through its own VAT return. The subcontractor never touches the money.

How each side reports the VAT

The reverse charge changes which boxes on the VAT return each party fills in. Nothing about the underlying work changes, only the accounting for the tax.

For a customer who can reclaim VAT in full, the entry in box 1 and the entry in box 4 are equal, so the reverse charge has no net cost. It simply records the VAT rather than paying it out and claiming it back through the supplier.

What the reverse charge does not cover

Several situations stay on normal VAT rules. Zero rated work, such as building a new home, is outside the reverse charge, and so is any supply where the customer is an end user or is not VAT registered. Work that falls outside the Construction Industry Scheme is not caught either. The table below is the quick sort.

Services excluded when supplied on their own

Some services are excluded when they are supplied by themselves, even though they are linked to construction. These include professional work by architects, surveyors and consultants, making and delivering building materials or components, installing seating, blinds and shutters, fitting security systems, signwriting, and drilling for oil or gas. Supply any of those alongside actual construction work in the same contract and the position changes, which is where the next point matters.

The 5% disregard

There is a helpful shortcut for mixed contracts. If the reverse charge part of a supply is 5% or less of the total value, you can ignore it and treat the whole supply in the normal way. The test looks at the overall value of the contract rather than each invoice, and both parties need to agree to use it from the start.

The cash flow effect and CIS

What changed for subcontractors

The biggest practical shock was cash flow. Before March 2021 a subcontractor received the VAT from its customer and held that money until the VAT return was due, which gave a useful cushion. Under the reverse charge that VAT is never received, so many subcontractors found their working capital tighter overnight. If your purchases now regularly carry more VAT than your sales, you may move into a repayment position, and you can ask HMRC to let you file monthly returns so refunds arrive sooner.

CIS deductions are unchanged

It is worth being clear that the reverse charge only moves the VAT. It does not touch the Construction Industry Scheme deduction. A contractor still takes the CIS deduction from the labour part of a subcontractor’s payment at the usual rate, whether that is 20%, 30% or gross, in exactly the same way as before.

How to get ready and avoid mistakes

1. Check each contract. Confirm that both sides are VAT registered, that the work is within the Construction Industry Scheme, and whether your customer is an end user.
2. Get status in writing. Ask for end user or intermediary confirmation before you decide how to invoice, and keep it on file.
3. Update your paperwork. Set your invoice templates and accounting software to flag reverse charge supplies and show the right wording.
4. Watch the cash. If you are regularly in a repayment position, look at moving to monthly VAT returns to protect your cash flow.

The mistakes HMRC sees most often are charging VAT when the reverse charge should apply, applying the reverse charge to an end user who should have been billed normally, forgetting to collect written confirmation of end user status, and treating zero rated new build work as though it were caught. A quick check against the conditions above heads off nearly all of them.

Frequently asked questions