Domestic Reverse Charge VAT: A Plain-English Guide for Contractors

Ask a room full of building contractors what does their head in most about tax, and "reverse charge VAT" comes up faster than anything else. It's not that it's complicated, it's that it's different from everything you did before, and getting it wrong means invoices bouncing back and cash you were counting on that never arrives.

Here's what the domestic reverse charge actually is, when it applies, what your invoices need to say, and, importantly, what it does to your cash flow.

What the reverse charge actually is

Since 1 March 2021, most construction services between VAT-registered businesses have been caught by the domestic reverse charge (DRC). Under the old rules, a subcontractor added 20% VAT to their invoice, the customer paid it, and the subcontractor handed it to HMRC later. Under the reverse charge, that flips: the subcontractor no longer charges the VAT at all. Instead, the customer accounts for it directly to HMRC.

It was brought in to stop "missing trader" fraud, where a subcontractor charged VAT, pocketed it and vanished before paying HMRC. By moving the VAT accounting to the customer, that cash never changes hands, so it can't go missing.

When does it apply?

The reverse charge applies when all of these are true. If any one of them isn't, you charge VAT the normal way.

1. Both of you are VAT registeredYou (the supplier) and your customer are both registered for UK VAT.
2. The work is reported under CISThe supply is of construction services (and any materials supplied with them) that fall within the Construction Industry Scheme.
3. It's standard or reduced-ratedThe VAT rate is 20% or 5%. Zero-rated work, such as most new-build residential, is outside the reverse charge.
4. Your customer isn't an "end user"They're buying your services to make an onward supply of construction, i.e. they're in the chain, not the final customer. (More on this below.)

In plain terms: if you're a subcontractor billing a main contractor for standard-rated construction work and you're both VAT and CIS registered, the reverse charge almost certainly applies.

If you're the subcontractor (the supplier)

You don't add VAT to your invoice. You state on it that the reverse charge applies and that the customer must account for the VAT. You still show what the VAT would have been, but you don't add it to the total the customer pays you.

The sting is in the cash flow. Under the old system, the 20% VAT sat in your bank between being paid and your VAT return, a handy chunk of working capital. Under the reverse charge, that money never lands in your account. Plenty of subcontractors got a nasty surprise in 2021 when their usual cash cushion simply disappeared. If you've become VAT registered since, plan for it.

If you're the contractor (the customer)

When a subcontractor invoices you under the reverse charge, you account for their VAT on your own return: you declare it as output VAT and, in the same breath, reclaim it as input VAT (subject to the normal rules). For most contractors the two cancel out, so there's usually no net VAT cost, but it must be recorded correctly on the return, and good software handles this automatically once it's set up.

The big exception: end users

The reverse charge only works while everyone is buying construction to sell construction on. The moment you reach the end user, the business or person who's having the work done for themselves and not making an onward supply, normal VAT rules apply again and the supplier charges VAT as usual.

A closely related category is the intermediary supplier, businesses connected or linked to an end user (for example, a landlord and tenant), who are treated the same way.

What your invoices must say

A reverse-charge invoice looks like a normal one with two differences: it shows the rate or amount of VAT to be accounted for (but doesn't add it to the total), and it carries a clear statement that the reverse charge applies. Wording such as "Reverse charge: customer to account for VAT to HMRC" is enough. Your accounting software can set this as a template so you're not retyping it every time.

The mistakes we see most often

• Charging VAT when you shouldn't, the customer's bookkeeper rejects the invoice and payment stalls.
• Applying the reverse charge to an end user, you should have charged VAT, and now there's a mess to unpick.
• No end-user confirmation on file, leaving you exposed if HMRC ever asks why you didn't charge VAT.
• Forgetting it covers materials too, when materials are supplied alongside reverse-charge labour, they're caught as well.
• Not planning for the cash flow hit, the missing 20% catches out newly VAT-registered subcontractors every year.

None of this is difficult once it's set up properly, it's a case of getting your software configured, your invoice templates right, and your end-user confirmations on file. After that, it genuinely does just run in the background.

This article is general guidance for building contractors, not advice for your specific situation. VAT and CIS rules have plenty of edge cases, always check your own circumstances with your accountant before acting.

← Back to all articles