VAT Domestic Reverse Charge for Trades: The Plain-English Version

The VAT domestic reverse charge is the rule that made a lot of subcontractors stop charging VAT to the firms they work for, and made a lot of main contractors start paying it to HMRC instead. It has been in force since March 2021 and it is still the most misunderstood piece of admin in UK construction. Here is the plain version.

This is a general explanation, not tax advice. The rules have edge cases and your situation may sit in one of them. Check with your accountant before you change how you invoice anybody.

What it actually does

Normally, you charge VAT to your customer, they pay it to you, and you pass it to HMRC.

Under the domestic reverse charge, for certain construction work, you do not charge the VAT at all. Your customer accounts for it directly to HMRC themselves. The money never touches your bank account.

That is the whole mechanism. Everything else is working out when it applies.

When it applies

Broadly, all of these have to be true at once:

• The supply is of construction services that fall within the Construction Industry Scheme
• Both you and your customer are VAT registered
• Both are registered for CIS
• The supply is standard rated or reduced rated, not zero rated
• Your customer is not an end user or an intermediary supplier

If any one of those is false, you invoice as you always did.

The part that trips everyone up: end users

An end user is, roughly, the business at the end of the chain. The one having the work done for their own purposes rather than selling it on as part of their own construction supply.

So if you are a subcontractor working for a main contractor who is building something for a developer, the reverse charge is likely in play between you and the main contractor. If you are working directly for a property owner who just wants the building fixed, they are almost certainly an end user and you charge VAT normally.

Crucially, the customer has to tell you they are an end user. They confirm it, ideally in writing, and you keep that confirmation. If they do not tell you, the default assumption runs the other way.

This is why so many firms got it wrong in 2021. They guessed at their customer's status instead of asking for it in writing.

What your invoice has to say

When the reverse charge applies, the invoice still shows the VAT rate or amount that would have applied, but you do not add it to the total. The invoice has to make clear that the reverse charge applies and that the customer is the one who must account for the VAT.

Something along the lines of "reverse charge: customer to account for VAT to HMRC" is the usual wording. Your accountant will tell you the exact phrasing they want to see.

The bit that actually hurts: cash flow

This is the real world effect and it is why the rule matters even to people who get the paperwork right first time.

Before the reverse charge, a subcontractor collected VAT from customers and held it until the quarterly return. That money was not yours, but it sat in your account, and a lot of firms were quietly running on it without ever framing it that way.

After the reverse charge, that float disappears. You are still paying VAT on your own materials and costs, but you are no longer collecting any on your sales. Many subcontractors moved from paying HMRC every quarter to being owed money by HMRC every quarter.

Two practical consequences:

• If you are now regularly in a repayment position, it may be worth discussing monthly VAT returns with your accountant, so you wait weeks rather than months for money back.
• If your business was leaning on the VAT float without realising, the gap has to come from somewhere, and that somewhere is usually getting paid faster. Getting invoices paid on time is the practical end of that problem.

How it sits next to CIS

They are different things that use the same definitions, which is exactly why people muddle them.

CIS is about deductions from payments for labour, taken at source and set against your tax. The reverse charge is about who accounts for VAT. A job can be inside CIS and outside the reverse charge, for example when your customer is an end user.

If the employment side is what you are wrestling with rather than the VAT, CIS against PAYE for trades teams covers that separately.

A short checklist

Before you invoice a new commercial customer:

1. Are we both VAT registered, and both CIS registered? Check, do not assume.
2. Is this work within CIS?
3. Have they confirmed in writing whether they are an end user?
4. Is the supply standard or reduced rated?
5. Does my invoice template carry the right wording for whichever answer applies?

Keep the written end user confirmations. They are the evidence for why you invoiced the way you did.

Where software fits

Honestly, only at the edges. This is an accountant's question and a process question before it is a software question.

What a job system can do is make sure the customer record carries their status and their confirmation, so whoever raises the invoice is not guessing. Ours does not calculate your VAT position and does not sync with your accounting package, so the figures reach your accountant by CSV export and a human hand. If automated VAT handling is what you need, that is your accounting software's job, not ours.

You can see what we charge and open the live demo if the bookings and getting paid side is what you are actually shopping for.

FAQ

What is the VAT domestic reverse charge for construction?
It is a rule under which a VAT registered subcontractor does not charge VAT on certain construction services to another VAT and CIS registered business. The customer accounts for that VAT directly to HMRC instead. It has applied since 1 March 2021.

Does the reverse charge apply when I work for a homeowner?
Generally no. A private individual is not VAT registered, so the conditions are not met and you charge VAT in the normal way.

What is an end user and why does it matter?
An end user is broadly the business at the end of the supply chain, having work done for its own purposes rather than supplying it onward. Supplies to end users are excluded from the reverse charge, and the customer needs to confirm that status to you, ideally in writing, which you then keep on file.

Why has my VAT position changed since the reverse charge came in?
Because you no longer collect VAT on affected sales but still pay it on your costs, many subcontractors moved into a regular repayment position. Some discuss switching to monthly VAT returns with their accountant so repayments arrive sooner.

Is the reverse charge the same as CIS?
No. CIS concerns deductions from payments for labour; the reverse charge concerns who accounts for VAT. They share definitions of what counts as construction work, which is why they are often confused.

Key takeaways

• Under the reverse charge you do not charge the VAT; your VAT and CIS registered customer accounts for it to HMRC.
• It applies only when every condition is met, and end user supplies are excluded.
• Get end user status confirmed in writing and keep it. Guessing is how firms got this wrong.
• The real bite is cash flow, because the VAT float you used to hold has gone.
• This is a general explanation and not tax advice. Check your own position with your accountant.