If you're a VAT-registered builder, electrician or groundworker, you've probably had an invoice bounced back with the words "reverse charge applies". It throws a lot of people. You did the work, you're VAT-registered, so why aren't you charging VAT?
The domestic reverse charge for construction changed the rules in March 2021. For most building work between VAT-registered businesses, the customer now accounts for the VAT, not you. Get it wrong and your invoices get rejected, your cash flow takes a hit, or you under-declare VAT to HMRC.
This guide explains who it applies to, when it doesn't, exactly what your invoice needs to say, and how to handle the maths. There are worked examples using current VAT rates throughout.
What is the domestic reverse charge for construction?
The domestic reverse charge (often shortened to DRC) is a VAT anti-fraud measure. It started on 1 March 2021 for building and construction services.
Normally, a supplier charges VAT, collects it from the customer, and pays it to HMRC. Under the reverse charge, the supplier doesn't charge VAT on the invoice at all. Instead, the customer accounts for that VAT directly on their own VAT return.
The customer effectively charges themselves the VAT and reclaims it at the same time, so for a fully VAT-recoverable business the net cash effect is nil. The point is that the VAT never passes through the subcontractor's bank account, which closes off "missing trader" fraud where a supplier collected VAT and disappeared without paying it over.
It only ever applies at the standard rate (20% for 2025/26) and the reduced rate (5%), per the VAT rates published on gov.uk. Zero-rated work, such as building a new home, stays zero-rated and the reverse charge doesn't bite.
Who does the reverse charge apply to?
Three things all have to be true at the same time. If any one of them is missing, you charge VAT the normal way.
| Condition | What it means |
|---|---|
| The service is a construction operation | It falls within the Construction Industry Scheme (CIS) definition, so things like building, alteration, repair, demolition, groundwork, installing heating or lighting, painting and scaffolding. |
| Both parties are VAT-registered | The supplier and the customer are both registered for UK VAT. |
| Both parties are CIS-registered, and the customer isn't the end user | The supply is reported under CIS, and the customer is buying the work to sell it on, not to use it themselves. |
In plain terms, the reverse charge is for business-to-business supplies down the construction chain. A subcontractor billing a main contractor is the classic case. The work is standard or reduced rated, both are VAT and CIS registered, and the contractor is reselling that work as part of a bigger project.
If you mostly work for other trades or main contractors, expect the reverse charge to apply to the bulk of your sales invoices. If you're a contractor or CIS subcontractor, this is now your default for B2B work.
When does the reverse charge not apply?
You charge VAT in the normal way, and the reverse charge does not apply, when any of these are true:
- The customer is not VAT-registered.
- The customer is not CIS-registered.
- The customer is an end user or an intermediary supplier (see below).
- The work is zero-rated (for example, constructing a new dwelling).
- You're supplying to a domestic customer, such as a homeowner having an extension built. Households aren't VAT-registered, so you charge VAT as usual.
- The service sits outside the CIS definition. HMRC's list of excluded work includes professional services from architects and surveyors, making building components off-site, installing security systems, and signwriting supplied on their own.
This last point catches people out. A specialist who only ever installs CCTV or alarm systems, for instance, is generally outside the reverse charge even when both parties are VAT and CIS registered, because that work isn't a CIS construction operation in its own right.
What is an end user and why does it matter?
An end user is a business that's VAT and CIS registered but uses the construction work itself rather than selling it on. Think of a property developer or a retailer having its own premises fitted out. The chain stops with them.
There are also intermediary suppliers, which are businesses connected or linked to an end user (for example, a landlord and a tenant in the same group) that buy the work and re-supply it without material change.
End users and intermediary suppliers get a normal VAT invoice, with VAT charged. The catch is that you can only treat a customer as an end user if they tell you so in writing. If they stay silent, you must apply the reverse charge.
HMRC's suggested wording for the customer to give you is:
"We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge."
Keep that statement on file. It's your evidence for charging VAT in the normal way, and it protects you if HMRC ever asks why a supply wasn't reverse-charged.
How do I word a reverse charge invoice?
Your invoice still has to be a valid VAT invoice with all the usual details. The differences are:
- You do not add VAT to the amount the customer pays.
- You state the VAT that would have applied, either as an amount or as the rate.
- You include a clear note that the reverse charge applies and that the customer must account for the VAT.
HMRC's rule is that you must "clearly state how much VAT is due under the reverse charge, or if this amount cannot be shown, state the rate of VAT, but do not include the VAT in the amount charged to the customer."
Acceptable wording includes:
"Reverse charge: VAT Act 1994 Section 55A applies. Customer to account for the VAT to HMRC."
So a £4,000 labour-and-materials invoice for reverse charge work shows £4,000 to pay, a note that the reverse charge applies, and a line showing £800 of VAT at 20% that the customer must account for, not pay to you.
Worked example: subcontractor to contractor
Illustrative example. Liam runs a VAT-registered and CIS-registered groundworks firm. He invoices a main contractor, also VAT and CIS registered, for £10,000 of standard-rated site clearance and excavation. The contractor is reselling that work as part of a housing scheme, so it is not an end user.
Because all three conditions are met, the reverse charge applies. Here's how the invoice and the VAT compare to the old rules, using the 20% standard rate for 2025/26.
| Item | Old rules (pre-March 2021) | Reverse charge |
|---|---|---|
| Net value of work | £10,000 | £10,000 |
| VAT at 20% | £2,000 | £2,000 (shown as a note, not added) |
| Total Liam invoices | £12,000 | £10,000 |
| VAT Liam collects in his bank | £2,000 | £0 |
| Who pays the £2,000 VAT to HMRC | Liam | The contractor accounts for it |
Liam receives £10,000. He never holds the £2,000 of VAT. On his VAT return he reports the £10,000 net sale but no output VAT on it.
The contractor declares £2,000 of output VAT on the supply and, assuming it's fully recoverable, reclaims the same £2,000 as input VAT. Net cash effect for the contractor: nil. That's the mechanism working as intended.
How do I report the reverse charge on my VAT return?
It splits cleanly between supplier and customer.
If you're the supplier (the subcontractor):
- Box 6: include the net value of the sale (£10,000 in Liam's example).
- Box 1: do not include any output VAT for the reverse charge supply.
If you're the customer (the contractor):
- Box 1: add the VAT due on the purchase to your output VAT (£2,000).
- Box 4: reclaim that same VAT as input VAT, subject to the normal recovery rules.
- Box 7: include the net value of the purchase.
Getting your bookkeeping software set up with a dedicated reverse charge VAT code makes this automatic. If your figures look off, the usual culprit is supplies coded as standard 20% when they should be reverse charge, which inflates your Box 1. Solid bookkeeping keeps these codes clean from the start.
What is the 5% disregard rule?
Some invoices mix reverse charge work with bits that aren't, like a small amount of CIS work inside a larger non-construction job.
HMRC lets you keep things simple. If the reverse charge element is 5% or less of the total invoice value, you can disregard it and charge VAT normally on the whole invoice. Above that, the reverse charge applies to the full supply.
In practice, if you're regularly supplying construction services to the same business, HMRC accepts that you can treat all your supplies to that customer as reverse charge to avoid switching back and forth invoice by invoice. Agree the approach with the customer and keep it consistent.
How does the reverse charge affect my cash flow?
This is the part subcontractors feel most. Under the old rules you collected VAT on your sales and held it until your VAT return was due, which gave a short-term cash cushion. Under the reverse charge that VAT never reaches you, so the cushion is gone.
If most of your sales are reverse-charged but you still pay VAT on materials, fuel and tools, you may flip into being a repayment trader, which means you reclaim VAT from HMRC rather than paying it over. That's not a problem, but you can speed up the refunds by switching from quarterly to monthly VAT returns.
Two more practical points:
- Flat Rate Scheme. Reverse charge supplies are excluded from the Flat Rate Scheme. If you're on it and a chunk of your sales are now reverse-charged, the scheme often stops being worthwhile, because it shrinks the turnover the flat percentage is applied to. Many subcontractors are better off on standard VAT accounting once the reverse charge applies to most of their work. It's worth a review.
- Registration. The reverse charge doesn't change when you must register for VAT. The threshold is £90,000 of taxable turnover for 2025/26, per gov.uk. Your reverse charge sales still count towards that threshold even though you don't charge VAT on them.
If you're a contractor or any trade weighing up whether the scheme still pays, a quick review of your VAT position usually pays for itself. Getting your VAT returns right is where the reverse charge most often goes wrong.
Quick decision steps
Run through these for each B2B supply:
- Is the work a CIS construction operation? No, charge VAT normally. Yes, continue.
- Are both you and the customer VAT-registered? No, charge VAT normally. Yes, continue.
- Is the supply reported under CIS, with both parties CIS-registered? No, charge VAT normally. Yes, continue.
- Has the customer told you in writing they're an end user or intermediary supplier? Yes, charge VAT normally and keep the statement. No, continue.
- All of the above point to the reverse charge? Apply it: no VAT added, state the VAT and the reverse charge note, and let the customer account for the VAT.
Talk to a Zmartly accountant about your VAT
The reverse charge is simple once it's set up properly, and painful when it isn't. If your invoices keep bouncing, your VAT returns don't reconcile, or you're not sure whether the Flat Rate Scheme still works for you, we can sort it.
Book a free 20-minute call with a Zmartly accountant and we'll review how the reverse charge applies to your construction business, get your software codes right, and check whether you should move to monthly returns. We work with construction firms, subcontractors and trades across the UK.
FAQs
Does the reverse charge apply to materials as well as labour?
Yes. When a supply qualifies for the reverse charge, it applies to the whole supply, including any materials supplied with the construction services. You don't split labour and materials.
Do I still need to be CIS-registered?
Yes. The reverse charge sits on top of CIS, it doesn't replace it. CIS deductions on labour still work as before. Keeping your VAT returns and CIS records aligned is worth tidying up at the same time.
What if my customer won't confirm they're an end user?
Then you apply the reverse charge. You can only treat a customer as an end user if they tell you in writing. If they stay silent, the safe and correct position is to reverse charge the supply.
Does the reverse charge apply to work for a homeowner?
No. Homeowners aren't VAT-registered, so the reverse charge can't apply. You charge VAT in the normal way on work for domestic customers.
Is the reverse charge a different tax I have to pay?
No. It's a change in who accounts for the VAT, not a new tax or a higher rate. The VAT amount is the same, it just moves from the supplier's return to the customer's return.
What VAT rate applies under the reverse charge?
The same standard rate of 20% or reduced rate of 5% that would normally apply to the work for 2025/26. You show that rate or amount on the invoice as a note, but you don't add it to the total the customer pays.
