What is the VAT reverse charge for construction?

The VAT reverse charge for construction (often called the Domestic Reverse Charge (DRC)) changes how VAT is accounted for in the construction industry.

Instead of the supplier charging VAT, the customer accounts for the VAT themselves on their VAT return.

This rule has been in place since 1 March 2021 and continues to apply in 2025/26.

How does the reverse charge work?

Under the reverse charge:

• The subcontractor does not charge VAT on their invoice
• The contractor accounts for VAT as both:
• • Output VAT (as if they made the sale), and
  • Input VAT (as if they made the purchase)

This means there is usually no cash payment of VAT, but it must still be reported correctly.

When does the reverse charge apply?

The VAT reverse charge applies when all of the following conditions are met:

• The work is subject to 5% or 20% VAT
• The work falls within the Construction Industry Scheme (CIS)
• Both the supplier and customer are VAT registered
• The customer is registered for CIS
• The customer is not an end user or intermediary supplier

It is the supplier’s responsibility to check that these conditions are met.

What types of work are included?

The reverse charge applies to most construction services covered by CIS, including:

• Building, alteration, repair and demolition
• Civil engineering works
• Installation of systems (heating, lighting, etc.)
• Decorating and finishing

It also applies to materials supplied as part of the job, even if invoiced separately.

When does the reverse charge NOT apply?

The reverse charge does not apply if the customer is:

1. An end user

This means the customer is the final recipient of the work and will not make onward supplies of construction services.

Example:

• A property developer building their own office

2. An intermediary supplier

This is typically a business connected to the end user, such as:

• Companies within the same group
• Landlords and tenants with a shared interest in the property

What must be included on the invoice?

If the reverse charge applies, the supplier must:

• Not charge VAT
• Clearly state that the reverse charge applies
• Include wording such as:
  “Reverse charge: customer to account for VAT to HMRC”
• Show:
  • The VAT rate (e.g. 20%), and
  • The amount of VAT the customer must account for

Example

A subcontractor issues an invoice for £10,000 for standard-rated work.

Instead of charging £12,000 (£10,000 + VAT), they:

• Invoice £10,000 only
• State the reverse charge applies
• Show VAT of £2,000 (for information only)

The contractor then:

• Declares £2,000 as output VAT
• Reclaims £2,000 as input VAT (if fully recoverable)

Why was the reverse charge introduced?

The reverse charge was introduced by HMRC to reduce VAT fraud in the construction sector, particularly where subcontractors collected VAT but failed to pay it over.

Common mistakes to avoid

• Charging VAT when the reverse charge should apply
• Failing to check if the customer is CIS and VAT registered
• Not identifying whether the customer is an end user
• Missing the required wording on invoices
• Incorrect VAT return entries

Practical considerations

Businesses should ensure that:

• Their accounting software is set up correctly for reverse charge transactions
• Staff understand when the rules apply
• Customer status (end user vs contractor) is confirmed and documented

Final thoughts

The VAT reverse charge significantly changes how VAT is handled in the construction industry, but it does not increase the overall VAT cost — it simply changes who accounts for it.

Getting this wrong can lead to VAT errors and HMRC penalties, so it is important to apply the rules correctly.

Action point:
Review your invoicing and accounting systems to ensure they correctly handle VAT reverse charge transactions.