Reverse Charge VAT (Construction)

Reverse charge VAT, formally the Domestic Reverse Charge (DRC) for building and construction services, is a UK VAT accounting rule that came into force on 1 March 2021. Under normal VAT rules, the supplier adds VAT to their invoice and remits it to HMRC. Under the reverse charge, that responsibility flips: the sub-contractor issues an invoice showing no VAT, and the main contractor accounts for the VAT directly on their own VAT return. The rule applies only to VAT-registered businesses that are also registered within the Construction Industry Scheme (CIS).

Which Services the Reverse Charge Covers

The reverse charge applies to the same construction operations covered by CIS, including constructing, altering, repairing, extending, or demolishing buildings and structures; installing heating, lighting, plumbing, air-conditioning, ventilation, fire protection, and drainage systems; painting and decorating during construction phases; and preparatory and completion services such as scaffolding, groundworks, excavation, and site clearance.

It applies to standard-rate (20%) and reduced-rate (5%) services only. Zero-rated supplies - such as new residential builds - follow normal VAT rules. There is no minimum transaction value: a £500 reactive electrical repair between two CIS-registered businesses is subject to the same rules as a £2 million fit-out contract. If any part of a supply falls under the reverse charge, the entire supply is treated as reverse charge, unless the reverse charge element is 5% or less of the total.

The reverse charge does not apply when the customer is an end user - typically a property owner, occupier, or developer building for their own use rather than making an onward supply of construction services. If a customer claims end user status, the sub-contractor must obtain written confirmation before issuing a standard VAT invoice and keep that confirmation on file.

What It Means in Practice for Sub-Contractors and Contractors

The practical effects depend on which side of the transaction you are on.

Sub-contractors issue invoices showing the net amount, the applicable VAT rate, and the VAT amount due - but with zero VAT charged and added to the invoice total. The invoice must include specific wording, for example: "Reverse charge: customer to account for VAT to HMRC." Because VAT is no longer received, sub-contractors who previously used collected VAT as short-term working capital will notice a tightening of their day-to-day cash position.

Main contractors receive net invoices and must declare the VAT amount as both output tax (Box 1) and input tax (Box 4) on their own VAT return. In most cases these offset each other, leaving no net VAT cost - but the obligation to account for it correctly sits with the contractor, not the sub-contractor.

Incorrectly charged VAT - where a sub-contractor adds VAT when the reverse charge should apply - requires a credit note and a corrected invoice. Accounting software must be configured to handle reverse charge transactions correctly so they appear in the right VAT return boxes and do not distort turnover reporting.