The domestic reverse charge for construction subcontractors

What it is

Since 1 March 2021, most building and construction services supplied between VAT-registered businesses in the Construction Industry Scheme are under the domestic reverse charge. Instead of the subcontractor charging VAT and paying it to HMRC, the customer (usually the main contractor) accounts for the VAT on its own VAT return. It was introduced to stop fraud where VAT was charged but never paid over.

For a subcontractor, the practical effect is simple: you do not add VAT to the amount you are paid, but your invoice must show that the reverse charge applies.

When it applies

The reverse charge applies when all of these are true:

• the supply is of construction services covered by the Construction Industry Scheme;
• both supplier and customer are registered for VAT;
• payments for the supply are reported under the Construction Industry Scheme;
• the customer is not an end user or an intermediary supplier connected or linked to an end user;
• the supply is at the standard or reduced rate of VAT (zero-rated supplies are not affected).

A subcontractor working for a main contractor on a construction project is the typical case.

When it does not apply

• End users: where the customer has told you in writing that it is an end user (for example a developer or a building owner), you charge VAT in the normal way.
• Customers not registered for VAT, or not in the Construction Industry Scheme.
• Zero-rated work, such as some new-build dwellings.
• Small incidental elements: where the construction services are only a small part of a larger supply that is not otherwise covered, the whole supply may fall outside the reverse charge. HMRC's guidance explains the test.

If you are not sure whether a customer is an end user, ask them to confirm their status in writing before you invoice. Many main contractors include it in the subcontract order.

What your applications and invoices should say

A reverse charge invoice still shows the VAT rate and the amount of VAT, but does not charge it. It must say that the reverse charge applies, for example:

Reverse charge: customer to account to HMRC for the VAT. VAT Act 1994 section 55A applies.

The total payable is the amount excluding VAT. Your payment applications should show the same position, so there is no confusion when the invoice follows. Our payment application template guide shows where it goes.

Effects on your own VAT

• You do not account for output VAT on reverse charge supplies, but you still include their value in the relevant box on your return.
• Because you no longer collect VAT from customers on most of your work, you may find you are reclaiming more than you pay. Some businesses move to monthly VAT returns to get repayments faster.
• Reverse charge supplies cannot be accounted for under the cash accounting scheme, and the flat rate scheme has its own rules for them. Check with your accountant.

Common mistakes

• Charging VAT to a main contractor when the reverse charge applies, or using reverse charge wording for an end user.
• Leaving the reverse charge wording off the invoice.
• Not checking a customer's end user status at the start of the job.

In Constructicore you set the VAT treatment for each subcontract, and every application shows the right VAT position and reverse charge wording. If you use Xero, the draft invoice is created with the matching tax rate. See how payment applications work in Constructicore.

Published 12 October 2026.