VAT Reverse Charge in Construction — What Subcontractors Need to Know

The domestic reverse charge for VAT has been in place in construction since 2021, and it still confuses a significant number of subcontractors. The basic problem is that it flips who accounts for VAT — and if you get it wrong, you either charge VAT you shouldn't have, or you fail to declare VAT that should have been collected.

Here's how it works in plain English.

What is the reverse charge?

Normally when you invoice for VAT-registered work, you charge VAT and pay it to HMRC. Under the domestic reverse charge, that changes — you don't charge VAT, and instead the customer (the contractor or developer) accounts for it themselves.

This was introduced specifically to tackle VAT fraud in the construction supply chain, where subcontractors were collecting VAT from contractors and then disappearing before paying it to HMRC.

When does the reverse charge apply? The reverse charge applies when all of the following are true:

You are VAT registered Your customer is VAT registered The work falls within CIS — it's construction work for the purposes of the Construction Industry Scheme Your customer is not the end user (i.e. they're going to make further onward supplies of the construction work)

The key phrase is "end user." If your customer is a homeowner or a business having their own office built for their own use, they're an end user and the reverse charge does not apply. You charge VAT normally.

If your customer is a contractor who will be billing a developer, who will be selling the properties — the reverse charge applies.

What goes on the invoice?

When the reverse charge applies, your invoice should:

Show the net amount (no VAT added) Include a note such as: "Reverse charge — customer to account for VAT at 20% under VATA 1994 s55A" Still show the VAT rate (20%) so the customer knows what to declare

You do not collect the VAT. You do not include it in your VAT return as output tax.

How does it affect your VAT return? This is where subcontractors run into problems. Under the reverse charge, you have no output VAT on those supplies — which means your VAT return may consistently show a repayment position (more input VAT than output VAT). That's normal and correct.

HMRC are aware this affects cash flow for subcontractors. If you're regularly in a repayment position because of the reverse charge, you can request monthly VAT returns to get the money back more quickly.

When does the reverse charge NOT apply? The reverse charge does not apply if:

Your customer is the end user You are not VAT registered Your customer is not VAT registered The work is zero-rated (e.g. new-build residential housing) You are supplying construction workers through an employment business (labour-only supply through a temp agency structure)

If you're doing domestic repairs and improvements for homeowners, you charge VAT normally. The reverse charge is specifically about B2B construction supply chains where both parties are VAT registered and the work falls under CIS.

The most common mistakes Charging VAT to a VAT-registered contractor when the reverse charge should apply — creates a VAT problem for both parties.

Not charging VAT to a homeowner (end user) because you've got confused about the rules — that's incorrect too.

Forgetting to note the reverse charge on the invoice — technically incorrect and can cause issues when contractors process your invoice.

How to make sure you get it right Before invoicing:

Is my customer VAT registered? (Ask them, check the HMRC checker if needed) Are they an end user or part of the supply chain?

Does the work fall under CIS?

If the answer to all three is yes to the last two and confirmed on the first, reverse charge applies.

Dayrates handles VAT reverse charge directly on the invoice — you tick the reverse charge option, it removes the VAT, adds the required wording, and presents it correctly. No manual calculations, no forgetting the note at the bottom.

If you're unsure Talk to your accountant before you invoice. Getting this wrong creates problems in both directions and can result in penalties. It's a one-off conversation that saves a lot of pain later.