Domestic reverse charge VAT for construction: what UK tradespeople need to know

The domestic reverse charge: a quick explanation

Since March 2021, the domestic reverse charge for building and construction services has changed how VAT works between VAT-registered businesses in the construction sector. Instead of the supplier charging VAT and paying it to HMRC, the customer accounts for the VAT on their own return. The money never changes hands.

If you are a VAT-registered tradesperson working for other VAT-registered construction businesses, this affects you directly. If you only work for homeowners and non-VAT-registered customers, it does not apply to your work.

When the reverse charge applies

The reverse charge applies when all of these conditions are met:

• The supply is of construction services listed in the CIS (Construction Industry Scheme)
• Both the supplier and customer are VAT registered
• The customer is registered for CIS (or should be)
• The supplier is not an end user or intermediary supplier
• The supply is reported within CIS

In plain language: if you are a VAT-registered subcontractor doing construction work for a VAT-registered contractor, you do not charge them VAT. They account for it on their own VAT return instead.

What counts as construction services?

The same services that fall under CIS: building, alterations, repairs, extensions, demolition, installation of heating/lighting/power/water/drainage, painting, decorating, and more. Professional services like architecture and surveying are excluded, as are manufacturing materials off-site.

How it works in practice

As a subcontractor (supplier)

When you invoice a VAT-registered contractor for construction work:

• Show the net amount on your invoice
• Do not add VAT
• Add a note stating: "Customer to account for VAT under the domestic reverse charge"
• Use tax code T21 (or your software equivalent) when recording the sale

On your VAT return, this sale goes in Box 6 (total value of sales) but not in Box 1 (VAT due). You still reclaim input VAT on your purchases as normal.

As a contractor (customer)

When you receive a reverse charge invoice:

• Account for the VAT on your VAT return (both output tax in Box 1 and input tax in Box 4)
• The net effect on your VAT return is zero (you charge yourself VAT and immediately reclaim it)
• You pay the subcontractor only the net amount

End users and intermediary suppliers

If you are the "end user" (the person or business the construction work is ultimately for), the reverse charge does not apply. You receive a normal VAT invoice and pay VAT as usual. You must tell your subcontractors that you are an end user so they know to charge VAT normally.

A main contractor working for a homeowner is an end user. A developer building homes for sale is an end user. A subcontractor working for a main contractor is not an end user.

Impact on cashflow

This is the big one. Before the reverse charge, subcontractors collected VAT from contractors and held it until their next VAT return. That VAT was essentially free cashflow for a few weeks. Now that money never arrives. Subcontractors need to plan for this.

If you previously relied on collected VAT to cover expenses, you need to adjust your cashflow management. Use the cash flow calculator to model the impact. You may need to invoice more frequently, reduce payment terms, or build a larger working capital buffer.

Common mistakes to avoid

• Charging VAT when you should not. If the reverse charge applies and you charge VAT, the contractor cannot reclaim it through the reverse charge mechanism. You will need to issue a credit note and reissue the invoice.
• Not checking your customer's VAT status. Verify their VAT number before deciding whether to apply the reverse charge.
• Forgetting the invoice notation. Your invoice must state that the reverse charge applies. Without this, your customer may not know to account for the VAT.
• Wrong VAT codes in your software. Standard-rated sales and reverse charge sales use different VAT codes. Using the wrong code produces incorrect VAT returns.

Record keeping for MTD

With Making Tax Digital now in force, your accounting software needs to handle the reverse charge correctly. Most cloud accounting packages updated their systems in 2021, but check that your software produces the right figures on your VAT return. InvoiceAdept marks reverse charge invoices automatically when you select the option.

FAQs

Does the reverse charge apply to materials?

If materials are supplied as part of a construction service, the whole supply falls under the reverse charge. If you sell materials only (no labour), the reverse charge does not apply and you charge VAT as normal.

What about the flat rate VAT scheme?

Businesses on the flat rate scheme cannot account for the reverse charge as a customer. If you receive reverse charge supplies, you may need to leave the flat rate scheme. As a supplier, you can remain on the flat rate scheme but the reverse charge sale is excluded from your flat rate calculation.

I work for both VAT-registered and non-VAT-registered customers. What do I do?

Apply the reverse charge only to supplies to VAT-registered construction businesses. Charge VAT as normal to homeowners, non-VAT-registered businesses, and end users. Your invoicing software should let you select the correct treatment per invoice.