Reverse charge VAT for construction
Since 1 March 2021, most construction subcontractors do not charge VAT to their contractor. The contractor accounts for it instead. It is simple once you see it, and it splits an invoice along a completely different line from CIS.
Updated 11 September 2026 · Tax year 2026/27
What reverse charge VAT does #
Normally a supplier charges VAT, collects it, and pays it to HMRC. Reverse charge VAT moves that job to the customer. The subcontractor issues an invoice with no VAT added. The contractor puts that VAT on their own return twice: once as output tax, because they are now accounting for it, and once as input tax, because they can reclaim it. The two entries cancel and nothing is actually paid.
It exists to stop missing trader fraud. Under the old rules a subcontractor could collect VAT from a contractor and disappear without ever paying it to HMRC. If the money never moves it cannot be stolen.
Reverse charge VAT explained, with an example #
Reverse charge VAT UK rules are simplest seen as a worked case. A subcontractor invoices a contractor £2,000.00 for labour. Normally they would add £400.00 of VAT and collect £2,400.00. Under the reverse charge they invoice £2,000.00, state that £400.00 of VAT is due under the reverse charge, and collect £2,000.00.
The contractor puts that £400.00 on their own return twice, as output tax and as input tax. The two cancel. That is the whole mechanism, and it is the reverse charge VAT example most people are looking for.
Note this is the domestic reverse charge for construction. Reverse charge VAT EU rules on cross-border services are a separate regime with different conditions, and the two should not be confused.
When the domestic reverse charge applies #
All four of these have to be true. Any one of them failing means you charge VAT as normal.
- Both businesses are VAT registered.
- The work is reported under CIS. The two schemes run on the same definition of construction work.
- The supply is standard or reduced rated. Zero-rated work, such as new build housing, is outside it.
- The customer is not an end user or an intermediary supplier.
What is reverse charge VAT, and how does reverse charge VAT work? #
What is reverse charge VAT in one sentence: it moves the obligation to account for VAT from the supplier to the customer, so the money never moves and therefore cannot go missing.
How does reverse charge VAT work in practice? The subcontractor issues an invoice showing the VAT but not adding it to the total. The contractor enters that VAT twice on their own return, once as output tax and once as input tax, and the two cancel out. Nobody pays anybody any VAT.
That is reverse charge VAT explained. HMRC guidance says the same thing at greater length: searches for reverse charge VAT explained HMRC land on the two pages linked at the foot of this one. HMRC publishes both the guidance and a detailed technical guide, linked at the foot of this page, and the wording below is the accepted form for an invoice.
End users and intermediary suppliers #
This is where most disputes start, because the exclusion depends on something only your customer knows.
An end user is a VAT and CIS registered business that does not pass the construction services on. A developer building for its own portfolio, a retailer fitting out its own shop, a landlord refurbishing its own building. The work stops with them.
An intermediary supplier is a VAT and CIS registered business connected or linked to an end user, which re-supplies the services to that connected party. Group structures and landlord-tenant arrangements throw these up regularly.
Reverse charge and CIS split the invoice differently #
This is the single thing worth understanding properly, because getting it wrong means every invoice you raise is wrong in two directions at once.
CIS is deducted from labour only. Materials, plant hire and fuel for plant all come out before the rate is applied.
The reverse charge covers the whole supply, including materials, where those materials form part of a construction service.
So a single invoice is cut along two different lines by two different schemes. Take a £2,000.00 labour-only job for a VAT-registered contractor, with the subcontractor registered for CIS at 20%:
| Labour | £2,000.00 |
| VAT at 20%, stated but not charged | £400.00 |
| Invoice total the contractor is asked for | £2,000.00 |
| Less CIS at 20% of labour | − £400.00 |
| Paid to the subcontractor | £1,600.00 |
The VAT figure appears on the invoice and is never added to the total. The CIS deduction is taken from the labour figure, never from the VAT. You can check the CIS half of that with the CIS calculator, which handles the reverse charge as one of its VAT options, and read the labour and materials split in what counts as materials.
What the invoice must say #
Everything a normal VAT invoice needs, plus two additions: a clear statement that the domestic reverse charge applies, and the amount of VAT due or the rate it is due at. HMRC does not mandate exact wording. A reverse charge VAT invoice example, and the form most commonly used, is:
Reverse charge: VAT Act 1994 Section 55A applies
An HMRC reverse charge VAT invoice example shows the same thing: every normal VAT invoice field, the statement, and the VAT stated but excluded from the total. The invoice generator adds the reverse charge wording and keeps the VAT out of the total when you pick that option.
The 5% rule #
Where the reverse charge element is 5% or less of the value of a supply, it can be disregarded and the whole supply treated under normal VAT rules. It is measured against the overall contract value rather than invoice by invoice, so a single small reverse charge item inside a large contract does not drag the contract into the scheme.
Judge it once, at contract level, and apply that decision consistently. Deciding invoice by invoice produces a contract that flips treatment halfway through, which is exactly what the rule is written to prevent.
Work under CIS that is outside the reverse charge #
Some work is reported under CIS but is specifically excluded from the reverse charge. These are charged with VAT in the ordinary way.
- Drilling for, or extracting, oil or natural gas
- Extracting minerals, and tunnelling or boring for them
- Manufacturing building or engineering components off site, and delivering them
- Professional work by architects, surveyors, and building or landscape consultants
- Making, installing and repairing artistic works such as sculptures and murals
- Signwriting, and erecting or installing signboards and advertisements
- Installing seating, blinds and shutters
- Installing security systems, including burglar alarms, CCTV and closed circuit television
Putting it on your VAT return #
If you are the subcontractor supplying the service:
- Put the net value of the sale in box 6.
- Put nothing in box 1. There is no output tax, because you did not charge any.
If you are the contractor receiving the service:
- Put the VAT on the purchase in box 1 as output tax.
- Reclaim the same VAT in box 4 as input tax, subject to the usual rules.
- Do not put the net value in box 6. It is a purchase, not a sale.
For most contractors boxes 1 and 4 cancel exactly and the reverse charge costs nothing. It is an accounting entry rather than a payment.
What it does to your cash flow #
For subcontractors this was a real hit, and it has not gone away. Before 1 March 2021, a subcontractor collected VAT on every invoice and held it until the quarterly return. That was an interest-free working capital float, and for many businesses it was quietly propping up the cash flow. The reverse charge removed it overnight.
Two things follow. First, if you are still on the standard VAT scheme and permanently in repayment, monthly returns get your money back four times faster than quarterly ones. Second, if you joined the VAT Flat Rate Scheme before 2021, check whether it still makes sense: reverse charge sales are excluded from flat rate turnover, which can leave you paying a flat rate percentage on a much smaller base than the scheme was chosen for.
It is also worth checking whether you still need to be VAT registered at all if most of your output is now reverse charged. The VAT threshold checker tests your rolling twelve months.
Common questions #
What is reverse charge VAT?
It moves the job of paying VAT from the supplier to the customer. The subcontractor invoices without adding VAT, and the contractor receiving the service accounts for that VAT on their own return as both output tax and input tax. In most cases the two cancel out and no money changes hands.
When does the VAT domestic reverse charge apply?
When both businesses are VAT registered, the work is reported under the Construction Industry Scheme, the supply is standard or reduced rated, and the customer is not an end user or an intermediary supplier. All four have to be true. If any one fails, you charge VAT normally.
What is an end user?
A VAT and CIS registered business that does not make an onward supply of the construction services it receives. A property developer building for its own portfolio is the usual example. They must tell you in writing that they are an end user, and until they do, the reverse charge applies.
Does the reverse charge apply to materials?
Yes, where materials are supplied as part of a construction service that falls within the reverse charge. This is the opposite of CIS, which is deducted from labour only. The two schemes split the invoice differently and that is the most common source of confusion.
What is the 5% disregard rule?
If the reverse charge element is 5% or less of the value of the supply, it can be disregarded and normal VAT rules applied to the whole thing. It is measured on the overall contract value, not invoice by invoice.
What does a reverse charge invoice have to say?
Everything a normal VAT invoice shows, plus a clear statement that the domestic reverse charge applies and the amount of VAT due or the rate it is due at. The VAT is stated but not added to the total.
Does the reverse charge apply if I am not VAT registered?
No. If you are not VAT registered you have no VAT to charge and the reverse charge is irrelevant to you. It also does not apply where your customer is not VAT registered, such as a private householder.