The VAT reverse charge for construction, explained

If you are a VAT registered subcontractor in construction, the domestic reverse charge changed the way you invoice, and it is still tripping people up years later. The rules are not complicated once they click, but the first time you meet them they feel backwards. Here is a plain explanation.

What the reverse charge is

Since 1 March 2021, most VAT registered construction firms no longer charge VAT to each other on the work they do. Instead of the subcontractor adding VAT and passing it to HMRC, the customer (the contractor above them) accounts for that VAT on their own return. HMRC brought it in to stop fraud where a supplier charged VAT, got paid it, then vanished without handing it over.

When it applies

The reverse charge applies when all of these are true: the work is a construction service covered by the Construction Industry Scheme, both you and your customer are VAT registered, your customer is CIS registered as a contractor, and your customer is not the end user. If any part of a job falls under the reverse charge, the whole invoice for that job usually follows it.

The end user exception

The key word is end user. If you are working directly for the person or business that owns or occupies the building, the reverse charge does not apply and you charge VAT the normal way. It only kicks in along the chain of contractors and subcontractors above that final customer. So a subcontractor invoicing a main contractor uses the reverse charge, but that main contractor invoicing the property owner charges VAT normally.

How your invoice changes

When the reverse charge applies, you do not add VAT to the total your customer pays. You still raise a proper VAT invoice, but you show that the reverse charge applies and that the customer must account for the VAT. HMRC accepts wording such as "Reverse charge: customer to account for VAT to HMRC". It is good practice to state the VAT rate or the amount of VAT that the customer will need to account for, even though you are not collecting it.

So a £2,000 labour invoice that used to be £2,400 with VAT becomes £2,000, with a note explaining the customer handles the VAT. You get £2,000, not £2,400.

Why it matters for your cash flow

This is the part that catches people out. Under the old system you collected that extra 20% and held onto it until your VAT return was due, which gave you a handy cash cushion in the meantime. The reverse charge removes that cushion. The money was never really yours, but losing the float can tighten cash flow, especially for labour only subcontractors.

There is a silver lining. Because you are now paying VAT on your purchases but collecting little or none on your sales, you may end up in a repayment position, with HMRC owing you rather than the other way round. If that is the case, it can be worth switching to monthly VAT returns so you get those repayments back sooner instead of waiting three months.

Getting it right

Two mistakes cause most of the trouble: charging VAT when the reverse charge should apply, and applying the reverse charge to an end user who should have been charged VAT normally. Before you invoice a customer for the first time, confirm in writing whether they are VAT registered, CIS registered, and whether they are the end user. Keep that confirmation on file.

Once you know a customer's status, the invoicing itself should be quick and consistent every time. Sending clean, correctly worded invoices and keeping the paperwork in one place is exactly what TradePilot is being built to help UK trades do. Join the waiting list and we will tell you when it is ready.