Domestic Reverse Charge VAT for construction: the plain-English guide

A mate of mine does first-fix plumbing for a main contractor on new-build sites. First time he raised an invoice after March 2021 he stuck the 20% VAT on it like he always had. The contractor's accounts office bounced it back the same afternoon and told him to read up on the reverse charge. He rang me half annoyed, half worried he'd done his books wrong for a month. He hadn't done anything criminal. He'd just missed a rule change that turned how he invoices the trade upside down.

If you sub-contract to other VAT-registered firms, the Domestic Reverse Charge changes who hands the VAT to HMRC. Here it is in plain English, with a worked example and the cashflow trap nobody warns you about.

What the reverse charge actually does

Normally, you charge VAT on your work, the customer pays it to you, and you pass it to HMRC on your VAT return. You are the collector.

The reverse charge flips that. For qualifying construction work, you no longer charge the VAT or collect it. The customer records the VAT on their own return as if they had charged it to themselves, then reclaims it on the same return. For most contractors the two figures cancel out, so no money actually moves to HMRC at that step. The point of it is to stop "missing trader" fraud, where a supplier charged VAT, took the cash, and vanished before paying HMRC. By moving the VAT accounting to the customer, that gap closes.

You still do the work. You still send an invoice. You just send it without VAT in the total, and you write on it that the reverse charge applies.

Does it apply to you? Run the five checks

The reverse charge applies only when every one of these is true. Miss any single one and you go back to charging VAT the normal way.

• You are both VAT registered. You and your customer.
• The work falls under CIS. If it is a service that gets reported under the Construction Industry Scheme, it is in scope. That covers most site work: groundwork, bricklaying, carpentry, plumbing, heating, electrics, plastering, painting and decorating, roofing, demolition.
• Your customer is CIS registered too. They report under CIS as a contractor.
• The supply is 20% or 5% rated. Standard-rated or reduced-rated work. Zero-rated work, like much new-build housing, is outside the reverse charge.
• Your customer is not an end user. They are buying your work to sell construction services on, not as the final stop.

The quick gut check: if you are a subbie invoicing another trade firm or a main contractor, the reverse charge probably applies. If you are invoicing a homeowner, a shop fitting out its own premises, or a developer building to sell, it probably does not.

What an "end user" is, and why it matters

An end user is a business that receives construction work but does not sell construction services on to anyone else. A landlord refurbishing a flat to rent, a factory having its own roof replaced, a developer building houses to sell. They are at the end of the construction supply chain.

When your customer is an end user, you charge VAT normally. But the responsibility sits with them to tell you, in writing, that they are an end user. Until they do, the default assumption is the reverse charge applies. So if you think your customer might be an end user, get it in writing before you invoice. A short email or a clause in the contract is enough.

A worked example with real numbers

Say you are a VAT-registered plumber sub-contracting first-fix work to a main contractor on a commercial refit. The contractor is VAT registered, CIS registered, and is not the end user, they are billing the building's owner. Your labour plus materials comes to £8,000.

The old way (before the reverse charge)

• Net work: £8,000
• VAT at 20%: £1,600
• Invoice total the contractor pays you: £9,600

You bank £9,600. The £1,600 sits in your account until your next VAT return, when you pay it over to HMRC. Quietly, that VAT money has been topping up your balance for weeks.

The reverse charge way (now)

• Net work: £8,000
• VAT shown for reference: £1,600 (20%)
• Invoice total the contractor pays you: £8,000

You bank £8,000. The contractor records £1,600 of output VAT on their own return and reclaims £1,600 of input VAT on the same return, so it nets to nil for them. You never touch that £1,600 at all.

Same job, same profit on paper. But £1,600 that used to pass through your account no longer does. Multiply that across every subbie invoice in a quarter and you can see why some firms got a nasty surprise the first time their VAT-fattened balance wasn't there anymore.

How to word the invoice

A reverse charge invoice looks like a normal invoice with one change to the totals and one line of wording added. You must show the VAT rate or the VAT amount that applies, make clear it is the customer's responsibility to account for it, and not include that VAT in the amount you are charging.

HMRC does not insist on exact wording, but the invoice must say clearly that the reverse charge applies and that the customer has to account for the VAT. The phrase "reverse charge: customer to account for VAT to HMRC" does the job. Show the VAT rate or amount so the customer knows what to record, but keep it out of the total they pay you.

The cashflow trap, and what to do about it

This is the part that actually hurts, and the part the official guidance is quiet about.

Under the old rules, the VAT you collected sat in your account between invoicing and your VAT return. It wasn't your money, but it was in your bank, and for a lot of firms it was silently smoothing over the gaps when a customer paid late. The reverse charge takes that away. You collect the net only, so there is no VAT float to lean on.

Two things help. First, if you mostly supply your labour under the reverse charge but still buy materials with VAT on them, you can end up reclaiming more VAT than you owe most quarters. That puts you in a refund position. You can ask HMRC to move you to monthly VAT returns so those refunds come back monthly instead of quarterly, which keeps cash moving.

Second, plan your float deliberately rather than relying on the old VAT cushion by accident. Know your numbers, keep a buffer, and get invoices out the day the work finishes so the money comes in sooner. Same-day invoicing does more for your cashflow than any clever VAT trick.

What NOT to do

1. Don't add VAT to a reverse charge invoice. If you charge VAT when the reverse charge applies, your customer's accounts office will bounce it, and if they pay it by mistake you both have a correction to make. Get the status right before you invoice, not after.
2. Don't assume a customer is an end user without it in writing. The default is that the reverse charge applies. If your customer is genuinely the end user, the onus is on them to tell you so in writing. No written statement, you use the reverse charge.
3. Don't forget your customer's VAT and CIS status can change. A firm that wasn't VAT registered last year might be now. Check status on new jobs rather than relying on what was true the last time you worked together.
4. Don't ignore the cashflow hit until it bites. The missing VAT float is real money you used to hold. Work out roughly how much VAT used to pass through your account in a quarter so the change doesn't catch you out mid-job.
5. Don't guess on mixed invoices. If a job has a small bit of reverse charge work alongside other supplies, and the reverse charge element is 5% or less of the whole, you can disregard it and treat the lot normally. Above that, apply the reverse charge to the qualifying part. When in doubt, check with HMRC or your accountant rather than splitting it by feel.

Where to check the detail

The full rules live on gov.uk, including the list of services in and out of scope and the technical guidance for edge cases. If your situation is unusual, a 20-minute call with your accountant is cheaper than getting a quarter of VAT returns wrong. HMRC takes a light-touch approach to genuine errors made in the early days of getting this right, but that goodwill does not last forever, so it is worth nailing down now.

For most subbies and contractors, though, it comes down to the five checks above, the net-only invoice, the wording line, and planning for the cashflow gap. Get those right and the reverse charge is just a different box to tick, not a headache.