Domestic Reverse Charge in Construction, Explained

Zubair Aslam
2 days ago
6 min read

Key Takeaways

Under the VAT domestic reverse charge (DRC), a VAT-registered subcontractor doesn't charge VAT to a VAT-registered contractor — the customer accounts for the VAT instead.
It applies where both parties are VAT and CIS registered, the payment is reported under CIS, and the work is standard (20%) or reduced (5%) rated. Zero-rated work is excluded.
The reverse charge is the default: it applies unless your customer tells you in writing that they're an end user or intermediary supplier.
Your invoice must state that the reverse charge applies and show the VAT due without adding it to the total.
DRC removes VAT from a subcontractor's incoming cash, which can turn you into a repayment trader — and it usually makes the Flat Rate Scheme not worth staying on. A construction-industry specialist accountant would notify you about this and provide suggestions on best practices.

The VAT domestic reverse charge is a rule that shifts responsibility for VAT from the supplier to the customer on most construction work between VAT-registered businesses. Introduced on 1 March 2021, it means a subcontractor invoices a contractor without adding VAT, and the contractor accounts for that VAT on its own return. HMRC brought it in to stop suppliers charging VAT and disappearing before paying it over.

Does the reverse charge apply? The five tests

Work through these in order. The reverse charge applies only if you answer yes to the first four and no to the last:

#	Test
1	Are you VAT-registered in the UK?	Yes → continue
2	Is your customer VAT-registered and CIS-registered?	Yes → continue
3	Will the payment be reported under CIS?	Yes → continue
4	Is the work standard-rated (20%) or reduced-rated (5%)?	Yes → continue
5	Has your customer notified you in writing that they're an end user or intermediary supplier?	No → the reverse charge applies

If any answer breaks the chain, you charge VAT as normal. Note test 5 in particular: the reverse charge is the default position. Without written notification from your customer, it applies.

Who counts as an "end user"?

An end user is a business that's VAT and CIS registered but doesn't make onward supplies of the construction services it buys — a property owner having work done on a building it occupies or lets, for example. The reverse charge doesn't apply to them.

An intermediary supplier is a VAT and CIS registered business connected to an end user, either by being in the same corporate group or by having an interest in the same land (a landlord and tenant, say). They're treated the same way.

Two things trip businesses up here:

End user status is optional and must be claimed in writing. HMRC's suggested wording is a statement confirming the customer is an end user for the purposes of section 55A of the VAT Act 1994, asking for a normal VAT invoice, and confirming they won't account for the reverse charge. It can be sent by post or email, or written into the contract — and you must keep it on file.
Domestic customers don't need to notify you. Private homeowners and other non-VAT-registered customers aren't in the reverse charge at all; you simply charge VAT as normal.

The single most common misunderstanding is a contractor claiming end user status because their customer is a private homeowner. That's wrong: if the contractor is selling on construction services it bought from you, it isn't an end user, regardless of who its own customer is. This distinction decides whether your invoice is right or wrong, so it's worth having a construction-specialist accountant sanity-check how your regular contracts should be treated.

How to invoice under the reverse charge

When the DRC applies, your invoice must:

Show no VAT in the amount payable — the customer pays you the net figure only.
State clearly that the reverse charge applies. Acceptable wording includes "Reverse charge: VAT Act 1994 Section 55A applies" or "Reverse charge: customer to pay the VAT to HMRC."
Show the VAT rate or the VAT amount due — so the customer knows what to account for — but exclude it from the total.

Your accounting software almost certainly has a DRC VAT code built in; using it saves setting the treatment manually each time.

How it appears on your VAT return

The mechanics differ depending on which side of the invoice you're on. For a £1,000 net supply at 20%:

	Subcontractor (supplier)	Contractor (customer)
Box 1 (output VAT)	£0	£200
Box 4 (input VAT)	—	£200
Box 6 (net sales)	£1,000	—
Box 7 (net purchases)	—	£1,000

For the contractor, boxes 1 and 4 cancel out, so no VAT is actually paid on the transaction. Note that the customer does not include the purchase in box 6.

The whole-supply rule and the 5% disregard

If any part of a supply falls under the reverse charge, the whole supply normally does. A joiner who builds a staircase off-site and installs it is making a reverse charge supply overall, even though installation is a small part of the job.

There's one relief: where the reverse charge element would be 5% or less of the total value, you can disregard it and apply normal VAT rules to the whole invoice.

What you can't do is split an invoice — separating labour from materials — to sidestep the reverse charge. HMRC treats linked contracts on the same site as a single supply, and this is an area they actively look at.

What DRC does to your cash flow

This is the part that hurts subcontractors. Before DRC, you collected VAT from contractors and held it until your return was due — useful working capital, even though it was never your money. Under the reverse charge, that cash simply doesn't arrive.

Because you're still reclaiming VAT on your own materials and costs while collecting none on sales, many subcontractors become repayment traders — owed money by HMRC each quarter rather than owing it. If that's you, switching to monthly VAT returns gets those repayments back four times faster, which is usually worth doing.

Two schemes also need reviewing:

Flat Rate Scheme. Reverse charge supplies are excluded from the flat rate calculation, so you'd pay a flat percentage on your remaining turnover while getting no benefit on DRC work. For most affected subcontractors the scheme stops making sense.
Cash Accounting Scheme. It can't be used for reverse charge supplies at all.

Common reverse charge mistakes

Charging 20% VAT out of habit on a job where DRC applied — the contractor can't reclaim it, and the invoice has to be credited and reissued.
Accepting a verbal claim of end user status. It must be in writing, and you must keep it.
Assuming your customer is an end user because their customer is a homeowner.
Splitting labour and materials onto separate invoices to avoid the charge.
Staying on the Flat Rate Scheme after DRC has removed most of your VATable sales.
Missing that you've become a repayment trader and leaving refunds sitting with HMRC for a full quarter.

Frequently Asked Questions

What is the VAT domestic reverse charge in construction? It's a rule, in force since 1 March 2021, that shifts responsibility for VAT from the supplier to the customer on most construction services between VAT-registered businesses. The subcontractor invoices without adding VAT, and the contractor accounts for both the output and input VAT on its own return. HMRC introduced it to prevent VAT fraud in construction supply chains.

Do I charge VAT to a contractor under the reverse charge? Usually not. If you're both VAT-registered, your customer is CIS-registered, the payment is reported under CIS, the work is standard or reduced-rated, and they haven't confirmed in writing that they're an end user, you invoice without VAT. You state that the reverse charge applies and show the VAT due without including it in the total.

What is an end user for reverse charge purposes? A VAT and CIS registered business that doesn't make onward supplies of the construction services it buys — typically someone having work done on a property they own, occupy, or let. End user status is optional and must be confirmed to you in writing before you can charge VAT normally. Because getting this wrong means reissuing invoices, it's worth having a construction-specialist accountant review how your contracts are set up.

Does the reverse charge apply to zero-rated work? No. The reverse charge only applies to standard-rated (20%) and reduced-rated (5%) construction services. Zero-rated work, such as building new dwellings, is outside it, so you invoice at 0% under normal rules.

Should I leave the Flat Rate Scheme because of the reverse charge? Often, yes. Reverse charge supplies are excluded from the flat rate calculation, so you gain nothing on DRC work while still applying the flat percentage to your other turnover. Most subcontractors with substantial reverse charge sales find the scheme no longer pays, but it's worth checking against your own figures before switching.

Getting your reverse charge treatment right

DRC errors are among the most common — and most expensive — VAT mistakes in construction: wrong invoices, bounced payments, and cash sitting with HMRC that should be in your account. Talk to the SiteLedger team on 0161 513 0027 and we'll review your invoicing, end user notifications, and VAT scheme so it's set up correctly. As construction-specialist accountants, the reverse charge is something we handle every day.

Written by the SiteLedger team — construction-specialist accountants. Last reviewed: July 2026. Rules and figures apply to the 2026/27 UK tax year. This is general guidance, not personal tax advice; reverse charge treatment depends on your specific contracts, so speak to us about your situation.