VAT Reverse Charge in Construction: What It Is and How It Works

The VAT domestic reverse charge (plenty of people call it the VAT reversal charge) moves the job of paying VAT from the business doing the building work to the business paying for it. Since 1 March 2021, when a VAT-registered subbie invoices a VAT-registered contractor for work that goes through CIS, the subbie doesn't add VAT to the bill. The contractor works out the VAT itself and puts it on its own VAT return instead.

That's the whole idea in two sentences. The rest of this article covers why HMRC did it, the conditions that decide whether it applies to a particular invoice, and what actually changes in the office for the subbie and for the contractor. If you only remember one thing, remember this: the reverse charge doesn't change how much VAT is due. It changes who hands it over.

Why HMRC brought in the VAT reversal charge

The old system had a weak spot. A subbie would add 20% VAT to its invoice, the contractor would pay it and reclaim it on its own return, and in the meantime the subbie was supposed to pay that VAT over to HMRC. Some didn't. A labour-supply company could collect VAT from a string of main contractors for a few quarters, then close down and vanish with the money. The contractor had still reclaimed the VAT, so HMRC was out of pocket twice over.

HMRC's own manual describes the measure as a response to "criminal attacks on the UK VAT system including missing trader fraud" in construction. By taking VAT out of the payment between two businesses in the supply chain, there's simply no VAT cash sitting with the subbie to disappear. The reversal charge was originally planned for 2019, was delayed twice, and finally went live on 1 March 2021.

Nobody is suggesting you're a fraudster because the VAT reversal charge applies to you. But everyone in the chain now has to follow the same process, including the honest firms, which is most of them.

When the domestic reverse charge applies

HMRC's technical guide sets out conditions that all have to be met. If any one of them fails, you go back to normal VAT rules and charge VAT as you always did.

1. Your customer is VAT registered in the UK.A homeowner isn't, so a kitchen extension for a private client never falls under the reverse charge.
2. The payment is reported within CIS.The reverse charge borrows the CIS definition of construction operations. If the work wouldn't go through CIS, it's outside. Architects, surveyors, scaffold hire without erection and plain materials supplies are examples of things that sit outside.
3. The supply is standard rated or reduced rated.Zero-rated work, such as most work on a new build house, isn't covered. There's no VAT to reverse.
4. You're supplying construction services, not staff.An employment business supplying workers on timesheets is supplying staff, which is outside. A labour-only subbie who takes responsibility for the finished work is inside.
5. The customer hasn't told you in writing that they're an end user or intermediary supplier.An end user is a VAT and CIS registered business that uses the work itself rather than selling it on, such as a developer or a landlord. They can opt out of the reverse charge, but only in writing.

The end-user rule is where most of the confusion lives, so we've given it a separate article. For now, the short version: if the person paying you is another builder who is going to bill someone else for your work, the reverse charge nearly always applies.

A simple before and after example

Here's an example with round numbers. A VAT-registered joinery firm does £10,000 of first fix and second fix work for a VAT-registered main contractor, who is going to bill the client for the whole job. The joinery firm is on the 20% CIS rate and £6,000 of the bill is labour.

Notice the CIS deduction is the same either way. CIS is worked out on labour, excluding VAT and materials, so the reverse charge doesn't alter it. What changes is the cash landing in the joiner's bank account, and that's the part that catches subbies out.

What changes for the supplier

If you're the subbie, your invoices change. You still show all the normal VAT invoice details, but you don't add VAT to the total. You state how much VAT the customer needs to account for (or the rate, if you can't show the amount) and add a note that the reverse charge applies, for example "Reverse charge: customer to pay the VAT to HMRC".

On your VAT return, you put the net value of those sales in box 6 and nothing in box 1. You still reclaim VAT on your van, fuel, tools and any materials you bought in the usual way. Put those two facts together and plenty of subbies who used to write a cheque to HMRC every quarter now get money back instead. That's good news in one sense, but it means the VAT you used to hold for a few weeks before paying it over is gone. If you'd got used to that money floating around in the account, you'll feel the difference. A proper 13-week cash flow forecast helps you see it coming →

What changes for the customer

If you're the main contractor, the subbie's invoice arrives without VAT added. You account for the VAT yourself on the same return: the VAT goes into box 1 as output tax, the same amount goes into box 4 as input tax (assuming you can recover VAT normally), and the net cost goes into box 7. For most contractors it nets to nil, so there's no extra tax. There is extra work, though.

You need to check your subbies' VAT numbers before paying, check each invoice treats VAT correctly, and make sure your own customers have told you in writing if they're end users. The responsibility sits with you. HMRC's manual is clear that the customer is still responsible for applying the reverse charge even if the supplier never sent a reverse charge invoice.

Main contractors who sell to end users, such as a developer or a housing association, still charge VAT to that client in the normal way. So most main contractors deal with both types of invoice every week, and their bookkeeping has to cope with both. If you're still working from a shoebox of receipts and a spreadsheet, this is usually the point where moving to proper cloud software pays for itself →

What doesn't change

The VAT rates don't change. CIS doesn't change, and the reverse charge isn't part of CIS even though it uses CIS to decide what's in scope. You still verify subbies, make deductions and file monthly CIS returns exactly as before. If you need a refresher on that side of things, our guide to getting CIS deductions right → covers it.

And the rules haven't gone away since they started. Five years in, we still see invoices with VAT added that shouldn't have it, and main contractors who have quietly been reclaiming VAT they paid to a subbie in error. HMRC's light touch on penalties only covered the first six months after March 2021. That grace period is long over.

Frequently asked questions

What is the VAT reversal charge in construction?

It is the domestic reverse charge for building and construction services. The customer, not the supplier, accounts for the VAT on CIS work supplied between VAT-registered businesses, so the supplier doesn't add VAT to its invoice.

When did the domestic reverse charge start?

It started on 1 March 2021 after two delays. It applies to supplies with a tax point on or after that date.

Does the reverse charge apply to work for homeowners?

No. A private homeowner isn't VAT registered and isn't in CIS, so you charge VAT in the normal way if you're VAT registered.

Does the reverse charge change how much VAT is paid?

No. The same amount of VAT is due. The customer declares it as output tax and normally reclaims it on the same return, so for most contractors it nets to nil.

Do I still deduct CIS if the reverse charge applies?

Yes. CIS and the reverse charge run side by side. The CIS deduction is worked out on the labour element excluding VAT, so it doesn't change.

This article is general guidance for building contractors, not advice for your specific situation. Always review your own circumstances with your accountant before acting.

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