Domestic Reverse Charge VAT for Construction Explained

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

The domestic reverse charge means you stop charging VAT to your construction customer and they account for it instead. It applies when you are VAT-registered, the work falls under the Construction Industry Scheme, your customer is VAT-registered and CIS-registered, and your customer is not the end user. You still show the VAT on the invoice — you just don’t collect it.

That last point is where most of the pain sits. If you were used to holding a chunk of VAT in the account between quarters, the reverse charge took that cushion away. Here is how it actually works on the tools.

Why the reverse charge exists

HMRC brought it in to stop missing trader fraud in construction — where a subcontractor charges VAT, gets paid it, and disappears before handing it over. Moving the VAT accounting up the chain to the customer removes the opportunity. It has been in force since March 2021, so it is not new, but it still catches out trades who register for VAT for the first time and suddenly find their invoices need rewriting.

Who it applies to

The reverse charge applies to a supply when all of the following are true:

The supply is of construction services (and any materials supplied with those services) that fall within the CIS rules.

Both you and your customer are VAT-registered in the UK.

Your customer is registered for CIS.

The supply is standard-rated or reduced-rated. Zero-rated work, such as qualifying new-build housing, is outside it.

Your customer is not an end user or an intermediary supplier.

In practice that means the reverse charge is a subcontractor-to-contractor thing. If you are a plumber second-fixing for a builder who is VAT- and CIS-registered and who is selling that work on to their own client, the reverse charge almost certainly applies.

Who it does not apply to

Work for homeowners is the big exclusion. Mrs Patel in Tunbridge Wells is not VAT-registered and is not registered for CIS, so a bathroom refit for her is a normal VAT invoice at the usual rate. Most domestic-only trades never touch the reverse charge at all.

It also does not apply where your customer is an end user — the business that will use the building rather than sell the construction services on. A VAT-registered pub chain having its kitchens refitted is an end user. A property developer selling the finished building is generally an end user too. And it does not apply to supplies of staff or workers on their own, or to materials supplied with no construction work attached.

The end-user exemption and why you need it in writing

The end-user rule is the one that causes arguments. The exemption only applies if the customer tells you in writing that they are an end user or intermediary supplier. Without that written statement, the default position is that the reverse charge applies.

Get it in an email, a signed letter, or a clause in the contract — anything you can produce later. A lot of larger contractors and property clients now issue an end-user declaration as standard at the start of a job. If yours hasn’t, ask before you invoice, not after. Something as simple as this does the job:

“We confirm we are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate.”

Keep that with the job file. If HMRC ever queries why you charged VAT on a CIS job to a VAT-registered contractor, that email is your answer.

How to word the invoice

Your invoice still needs everything a normal VAT invoice needs, plus two changes:

Don’t add the VAT to the total. The customer pays you the net figure only.

Show the VAT rate or the VAT amount that the customer must account for, and state clearly that the reverse charge applies.

HMRC accepts wording along the lines of “reverse charge: VAT Act 1994 Section 55A applies” or “reverse charge: customer to pay the VAT to HMRC”. A simple layout works fine:

Item

Amount

Second fix plumbing, 14 Mill Road

£2,400.00

VAT — reverse charge applies, customer to account to HMRC at 20%

£0.00

Total due

£2,400.00

Then the note underneath: Reverse charge: VAT Act 1994 Section 55A applies. Customer to account for the VAT to HMRC at the standard rate.

On your VAT return you record the net value of the sale, but no output tax. Your customer records both the output tax and, where they can recover it, the matching input tax — so for most of them it nets to nothing in cash terms.

The 5% disregard

If a contract includes some work that falls under the reverse charge and some that doesn’t, and the reverse-charge element is 5% or less of the total value of the supply, you can disregard it and treat the whole invoice as normal. It is a sensible bit of practicality for a job that is mostly outside CIS with a small element inside it. Don’t stretch it — it works on value, and it is worth documenting your calculation if you rely on it.

The cash-flow hit nobody warns you about

Here is the bit that hurts a growing subcontractor. Before the reverse charge, a VAT-registered subbie collected 20% on top of every invoice and sat on it until the quarter-end. That money was never yours, but it made the bank balance look healthy, and plenty of small firms were quietly using it as working capital.

Under the reverse charge, that money never arrives. If most of your turnover is subcontract work for contractors, your VAT return may now be permanently in repayment — you are reclaiming VAT on materials, fuel and tools while charging none on sales.

Two practical responses. First, if you are regularly in repayment, consider moving to monthly VAT returns so the money comes back twelve times a year instead of four. You can change your return frequency through your VAT online account. Second, redo your cash-flow forecast on net figures only. If your buffer was really the VAT float, you need a genuine one.

Also worth knowing: reverse charge supplies can’t be dealt with under the cash accounting scheme, and they are excluded from your flat rate scheme turnover. If you’re on the flat rate scheme and most of your work is now reverse-charged, the scheme is often no longer worth being in. That is a conversation for your accountant with your actual numbers in front of them.

Getting it wrong — and fixing it

The two common errors are charging VAT when you should have reverse-charged, and reverse-charging when the customer was an end user. Neither is a disaster if you catch it. Issue a credit note and a corrected invoice, and tell the customer why. HMRC has generally taken a reasonable line where a business has made a genuine effort to apply the rules and can show its working — which is another reason to keep those end-user declarations.

If you are close to the £90,000 VAT registration threshold and doing mostly subcontract work, factor this in before you register. Registration will change what lands in your bank each month, not just what you owe.

FAQ

Does the reverse charge apply to work for homeowners? No. Private domestic customers are not VAT-registered or CIS-registered, so you charge VAT as normal.

Do I still show VAT on the invoice? Yes. You show the rate or the amount the customer must account for, state that the reverse charge applies, and exclude it from the total due.

What if my customer won’t confirm whether they are an end user? Without written confirmation, the reverse charge applies. Apply it and keep a record that you asked.

Does it apply to materials? Yes, where materials are supplied as part of a construction service covered by the rules. Materials supplied on their own, with no work attached, are outside it.

I’m on the flat rate scheme — what changes? Reverse charge supplies are excluded from your flat rate turnover. If most of your work is reverse-charged, the scheme may no longer suit you. Check with your accountant.

Should I move to monthly VAT returns? If your returns are consistently repayments, monthly returns get the cash back sooner. You can change the frequency in your VAT online account.

Getting more of the work that pays for all this

Sorting your VAT position is worth doing properly, but it only matters if the work is coming in. Trade Pilot is free to join and only charges when a real local job lands in your inbox — no monthly fee whether you win work or not. Each lead goes to a maximum of three trades in the area, so you are not one of ten firms racing to undercut each other on the same job.

Related reading: VAT threshold for trades · VAT flat rate scheme · CIS deduction rates · how to register for CIS