Domestic Reverse Charge VAT for Construction — Explained

What the domestic reverse charge for construction is

The VAT domestic reverse charge (DRC) for building and construction services has applied since 1 March 2021. It changes who accounts for VAT on certain construction supplies between VAT-registered businesses — not whether VAT is due, but who declares it to HMRC.

Under normal VAT rules, a subcontractor charges VAT on their invoice, collects it from the contractor, and pays it to HMRC. Under the reverse charge, the subcontractor does not charge VAT at all. Instead, the contractor (the customer) accounts for the VAT on their own VAT return — declaring it as output tax and, subject to the normal rules, reclaiming it as input tax on the same return. The net effect for the contractor is usually nil, but no VAT changes hands between the two businesses.

HMRC introduced the DRC specifically to tackle VAT fraud in construction supply chains, where some subcontractors were charging VAT, being paid it, and then disappearing before paying it over to HMRC.

Which supplies the reverse charge applies to

The DRC applies to standard-rated or reduced-rated construction services that fall within the scope of the Construction Industry Scheme (CIS) — broadly, the same "specified services" definition used for CIS deductions. See our guide to the Construction Industry Scheme for how CIS itself works.

It applies between VAT-registered businesses where:

• The supply is within the scope of CIS (construction, alteration, repair, extension, demolition of buildings or civil engineering works, and related installation work such as heating, lighting, power, water and drainage systems)
• Both the supplier and the customer are VAT-registered
• The customer intends to make an onward supply of those construction services (i.e. they are not the end user)
• The supply is not zero-rated

Services excluded from CIS — and therefore outside the reverse charge — include professional services such as architecture, surveying, and consultancy that do not involve physically carrying out construction work, along with the supply of materials alone with no labour.

Who it does not apply to: end users and intermediary suppliers

The reverse charge does not apply where the customer is an "end user" — a business that receives construction services but does not sell those services on as part of a construction supply (for example, a retailer having its own shop renovated). It also does not apply where the customer is an "intermediary supplier" connected to an end user, such as a landlord recharging costs to a tenant, provided the end user and intermediary conditions are met.

In both cases, the customer must give the supplier written confirmation that they are an end user or intermediary supplier before the reverse charge treatment is dropped. Without that written notification, the supplier should apply the reverse charge by default. Getting this confirmation in writing — and keeping it on file — protects both parties if HMRC later queries the VAT treatment.

How reverse charge invoices work

When the reverse charge applies, the supplier's invoice must:

• Show the VAT that would have been due, or the rate of VAT applicable, so the customer knows how much to account for
• Make clear that the reverse charge applies, typically with wording such as "Reverse charge: customer to account for VAT to HMRC" or a reference to the relevant VAT notice
• Not include that VAT amount in the total the supplier is asking the customer to pay

On the supplier's side, the net value of the sale is still included in Box 6 of their VAT return (total value of sales), but no output VAT is declared in Box 1 for that supply. On the customer's side, they declare the reverse charge VAT in Box 1 (as output tax) and, if they can recover it under normal input tax rules, the same amount again in Box 4. For a full walkthrough of what belongs in each VAT return box, see our step-by-step VAT return guide.

Cash flow and the Flat Rate Scheme

The reverse charge removes a cash flow benefit that some subcontractors previously relied on: holding VAT collected from contractors between the time of invoicing and the time it was due to HMRC. Under the reverse charge, subcontractors no longer collect that VAT at all, so this short-term cash flow cushion disappears. Subcontractors whose customer base is mostly other VAT-registered contractors should plan for this rather than being caught out by it.

The reverse charge also interacts with the VAT Flat Rate Scheme. Reverse charge sales are not included in flat rate turnover, because no output VAT is collected on them. A subcontractor whose sales are mostly subject to the reverse charge may find the Flat Rate Scheme no longer makes sense, since there is very little VAT-bearing turnover left to apply the flat rate to, while flat rate purchases still attract no input VAT recovery. It is worth reviewing whether staying on the scheme, or leaving it, better fits your situation once a significant share of your sales fall under the reverse charge.

Common mistakes

Applying VAT as normal out of habit. Charging VAT on an invoice that should have been reverse-charged means the subcontractor has charged VAT they should not have, and the contractor cannot simply reclaim it as input tax in the normal way — it needs correcting.

Not checking the customer's VAT and CIS status before invoicing. The reverse charge only applies between two VAT-registered businesses operating within CIS. If the customer is not VAT-registered, standard VAT rules apply as normal.

Missing the end-user declaration. If you are an end user or intermediary supplier, confirm this to your supplier in writing before work starts — otherwise you may receive reverse-charge invoices in error.

Software not set up for reverse charge codes. Xero, QuickBooks and other MTD-compatible platforms have dedicated VAT codes for the construction reverse charge. Using the wrong code will misstate your VAT return. If you are unsure which code applies to a particular contract, check with whoever prepares your bookkeeping before the invoice goes out, not after.