The VAT domestic reverse charge for construction

What is the domestic reverse charge?

It moves the job of paying VAT to HMRC from the business doing the work to the business paying for it. The subcontractor sends an invoice with no VAT added. The contractor works out the VAT that would have been charged and puts it on their own VAT return.

It has applied to construction since 1 March 2021, and it is not optional. GOV.UK: The VAT domestic reverse charge must be used for most supplies of building and construction services. It is a different rule from the reverse charge on services bought from abroad.

Why does the reverse charge exist?

To stop VAT fraud in construction labour chains. Some businesses charged VAT, collected it and closed down before paying it over. If the subcontractor never receives the VAT, there is nothing to take. HMRC’s policy paper puts it this way: This is an anti-fraud measure which removes the opportunity for fraudsters to charge VAT and then go missing, before paying it over to the Exchequer.

Who does the reverse charge apply to?

To construction work sold from one VAT registered business to another, where the customer pays for it under CIS. All of these have to be true:

• The work is done in the UK.
• You and your customer are both registered for VAT.
• Your customer is registered for CIS and is paying you under CIS.
• You are not an employment business supplying workers.
• The work is standard or reduced rated, not zero rated.
• Your customer has not told you in writing that they are an end user or intermediary.
• It is construction work that falls under CIS, not goods or hire on their own.

GOV.UK: The charge applies to standard and reduced rate VAT services, for VAT registered businesses and work reported within CIS.

From 1 April 2027, fitting insulation, solar panels, heat pumps and other energy-saving materials in homes (not new builds) goes from 0% to 5% VAT (law already). That makes it reduced rated work, so on our reading of HMRC’s rules, a VAT registered subcontractor doing it for a VAT registered contractor under CIS would use the reverse charge from that date, if the other conditions above are met. HMRC has not said this about April 2027 itself, but where the work is for a householder, its guide already says supplies made to the contractor by subcontractors will still be subject to the reverse charge if the other conditions are met. Which installs count, and how jobs that cross the date are taxed, are covered in our guide to VAT on solar panels, heat pumps and insulation.

Check your own invoice

Answer a few questions about the job and the checker tells you whether the reverse charge applies, and why. If the answer needs a person to look at it, it says so.

Does the reverse charge only apply to CIS work?

Yes. It covers the same work as CIS, with one exception for employment businesses. If a job would not count as a construction operation under CIS, the reverse charge does not apply to it either.

GOV.UK: The list of services in this guide is the same as the list of ‘construction operations’ covered by the Construction Industry Scheme, except for supplies of workers provided by employment businesses.

What counts as construction work under CIS

What if my customer is VAT registered but not CIS registered?

Then the reverse charge does not apply, and you charge VAT as normal. Your customer has to be registered for both. The same goes for work for homeowners: HMRC says if services are provided to a private domestic customer, the reverse charge does not apply because the customer will not be VAT registered.

What is not covered by the reverse charge?

Work outside CIS, and some services HMRC names. Charge VAT as normal for these when they are supplied on their own:

• Professional work by architects, surveyors and building, engineering, decoration or landscape consultants.
• Making building components, materials, plant or machinery, or delivering them to site.
• Installing security systems such as burglar alarms, CCTV and public address systems.
• Installing seating, blinds and shutters.
• Signwriting, and putting up or repairing signs and advertisements.
• Making, installing or repairing purely artistic work such as sculptures and murals.
• Drilling for oil or gas, and extracting minerals.

Normal VAT also applies to:

• Zero rated work, such as most new build housing.
• Materials sold on their own, and hire of equipment or plant without labour.
• Workers supplied by an employment business, even for CIS work.
• Customers who have told you in writing they are an end user or intermediary.

GOV.UK: Do not use the charge for the following services, when supplied on their own. HMRC’s technical guide: The hire of goods only is not within the scope of the Construction Industry Scheme and therefore the reverse charge does not apply to the hire charge, and Supplies by employment businesses are not subject to the reverse charge, even if those supplies are within the scope of the Construction Industry Scheme.

What is an end user, and what is an intermediary?

An end user is a VAT and CIS registered business that buys construction work and does not sell it on, such as a business having its own premises built. An intermediary buys the work and passes it to a connected end user without changing it, such as a landlord for a tenant.

Either way, it only counts once they tell you in writing: The reverse charge does not apply for supplies to end users when the end user tells their supplier or building contractor in writing that they’re an end user. Until then, HMRC says you should still apply the reverse charge rather than charge VAT under normal rules. And a main contractor is rarely one: Building contractors are not usually end users because they make onward supplies of construction services.

HMRC on intermediaries: If you buy construction services and re-supply them to a connected or linked end user, without making material changes to the supplies, you can be treated as an end user and the reverse charge does not apply.

Who counts as an end user, in full

Does the reverse charge apply to materials?

Yes, when they come with the work. Labour and materials on one job are one supply for VAT, so the reverse charge covers the whole invoice, not just the labour. You cannot split them to keep VAT on the materials.

HMRC: If goods are supplied with construction services this is a single supply for VAT purposes. The reverse charge applies to the full value of the invoice.

What is the 5% disregard?

A way to keep normal VAT on a job where the reverse charge part is small. If the reverse charge work is 5% or less of the whole contract, you can both agree to ignore it and charge VAT on everything as normal. It only works if:

• you and your customer both agree to use it,
• you agree from the start of the contract, not later, and
• it is measured on the overall contract value, not one invoice at a time.

Without all three, any reverse charge work on the invoice puts the whole invoice under the reverse charge.

HMRC: If the reverse charge part of the supply is 5% or less of the whole supply value this can be disregarded. It only applies where both the supplier and customer (sub-contractor and contractor) agree, from the start of the contract, that it should apply on the basis of the overall contract values. The 5% should not be calculated on an invoice by invoice basis.

How does the reverse charge work? A worked example

A VAT registered plasterer invoices a main contractor £4,000 for work on a shop refit, at the standard rate of 20%. Here is the same invoice with and without the reverse charge.

Under the reverse charge the contractor pays the VAT, but reclaims the same £800 on the same return, so for most contractors it costs nothing. HMRC tells the contractor: you’ll have to account for the VAT in your VAT Return and recover it simultaneously on the same VAT Return.

The invoice still has to show the £800 so the contractor knows what to account for. On reduced rate work the same steps apply at 5%.

The reverse charge on your VAT return, box by box

What does a reverse charge invoice need to show?

No VAT in the total, a note that the domestic reverse charge applies, and the VAT the customer has to account for. That last one is the part most often left off.

A reverse charge invoice example, with the wording HMRC accepts

How does the reverse charge affect a subcontractor?

You get paid less cash in, because the VAT never reaches you. In the example the plasterer receives £4,000 instead of £4,800. That £800 was always HMRC’s, but it used to sit in your account until your VAT return was due.

You still reclaim VAT on your own costs, so HMRC may end up owing you money each quarter. If that happens, you can apply to move to monthly VAT returns.

HMRC: your customers will not be paying you VAT, which will reduce the gross value of payments coming into your business. The reverse charge may also mean your business will make net repayment claims to HMRC. You can apply to move to monthly returns using your online VAT account.

Other reverse charge questions

HMRC: It is optional so there is no legal obligation to be treated as an end user. If the scaffold supplier’s invoice shows a single charge for the hire of scaffold and labour, the full value of the supply is subject to the reverse charge, unless the customer is an end user. You cannot use the VAT Cash Accounting Scheme for supplies or services you buy or sell that are subject to the reverse charge.