VAT Domestic Reverse Charge for Construction: When It Applies
A decision checklist for the construction reverse charge, the end user exemption most people miss, the wording your invoice legally needs, and what it does to your cash flow.
What changed, and why
Before March 2021, a VAT-registered subcontractor charged VAT to the contractor, collected it, and paid it to HMRC. Some of them collected it and disappeared. That fraud is what the domestic reverse charge was built to stop.
Now, on qualifying work, you charge no VAT and your customer accounts for it on their own return. The money never passes through your hands, so it can't go missing.
Does it apply to this job?
Work through these. It applies only if the answer to all five is yes:
• Is the supply within the scope of CIS?
• Is the supply standard rated or reduced rated for VAT? (Zero-rated work is out.)
• Is your customer VAT registered?
• Is your customer registered for CIS as a contractor?
• Is your customer not an end user and not an intermediary supplier?
One "no" anywhere and you charge VAT normally.
The end user exemption is the one people miss
An end user is a customer who receives the construction work for their own use rather than to sell on as part of another construction supply. A property developer building to sell is usually in the chain. A supermarket having its own store rewired is usually an end user.
The important part: the end user has to tell you in writing. If they haven't, and the other four conditions are met, you apply the reverse charge.
Sensible practice is to ask the question at quote stage and keep the answer on file. "Are you an end user for VAT reverse charge purposes?" in an email costs you nothing and settles it.
When it definitely doesn't apply
• Domestic customers. A homeowner isn't VAT registered and isn't a CIS contractor. Charge VAT as normal.
• Zero-rated supplies, such as qualifying new-build residential work.
• Materials only, with no construction service attached.
• Employment businesses supplying staff rather than construction services.
If most of your work is domestic rewires and consumer units for homeowners, the reverse charge probably never touches you.
What your invoice must say
This is where invoices get rejected. A reverse charge invoice must:
• Show £0.00 VAT on the supply
• State clearly that the reverse charge applies
• State that the customer is required to account for the VAT
• Show the VAT amount the customer must account for, or enough detail for them to work it out
HMRC accepts wording along the lines of:
> Reverse charge: customer to account for VAT to HMRC (VAT Act 1994 s55A).
Leaving that note off is what makes a reverse charge invoice invalid. The customer's bookkeeper can't process it, and it comes back.
What it does to your cash flow
This part is worth planning for. Under the old rules you collected VAT from contractors and held it until your return was due. That was working capital, even if it was never really yours.
Under the reverse charge that money never arrives. If most of your work is subcontracted to VAT-registered contractors, your cash position is permanently tighter than it used to be by roughly 20% of your labour turnover.
Two things help:
• Consider monthly VAT returns. If you're now regularly in a repayment position because you pay VAT on materials but charge none on your sales, monthly returns get that money back four times faster than quarterly.
• Review the Flat Rate Scheme. Reverse charge supplies are excluded from flat rate turnover, which often makes the scheme a poor fit once most of your work is reverse charged. Many subcontractors were better off leaving it.
Reverse charge and CIS together
They frequently apply to the same invoice, and they stack in a specific order. VAT comes off (or rather, is never added). CIS is deducted from the labour element before VAT.
| Line | Amount | | --- | --- | | Labour | £800.00 | | Materials | £400.00 | | Subtotal | £1,200.00 | | VAT (reverse charge) | £0.00 | | Total | £1,200.00 | | Less CIS at 20% on labour | −£160.00 | | Amount payable | £1,040.00 |
The full CIS calculation is in CIS deductions on invoices, explained.
Getting the wording right automatically
Our free VAT invoice generator has a reverse charge switch. Turn it on and the invoice shows £0 VAT with the required note and the VAT figure your customer must account for. Combine it with CIS and both are calculated consistently.
This article is general guidance, not tax advice. The reverse charge has edge cases, particularly around mixed supplies and intermediary suppliers. Check with your accountant or HMRC if a job doesn't fit cleanly.
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