Reverse charge VAT: What is it & who does it affect?

Since 1 March 2021, most building and construction services supplied between VAT-registered businesses in the Construction Industry Scheme (CIS) have been subject to the VAT domestic reverse charge. Instead of the subcontractor charging VAT, the contractor receiving the service accounts for it on its own VAT return.

HMRC initially applied a light-touch approach to active compliance checks, but new CIS anti-fraud powers took effect in April 2026, so getting the reverse charge right is more significant than ever.

Why does the reverse charge exist?

HMRC introduced the reverse charge mechanism to tackle ‘missing trader’ fraud, where a supplier charges and collects VAT for its services, but then disappears before ever paying it to HMRC. Moving the obligation to the customer means the supplier never handles the VAT, and therefore nothing can go missing.

How reverse charge VAT works

Under the normal rules, a subcontractor adds VAT to its invoice and pays it to HMRC. Under the reverse charge, the subcontractor issues an invoice without VAT and states that the reverse charge applies. The customer records the VAT as output tax on its own VAT return and, in most cases, reclaims the same amount as input tax. For a business that can recover all its VAT, the net cost is nil, but both entries must still appear on the return.

When does the reverse charge apply?

The reverse charge applies when all of the following are true:

The service falls within the CIS definition of construction operations.
The supply is standard-rated or reduced-rated for VAT.
Both the supplier and the customer are registered for VAT in the UK.
The customer is registered for CIS.
The customer has not notified the supplier in writing that it is an end user or intermediary supplier.

If any of these conditions is not met, normal VAT rules apply.

Zero-rated construction services, such as most work on new-build dwellings, are outside the reverse charge. Standard-rated elements on those projects can still fall within it, so contractors should check each supply rather than each project.

Who it affects in practice

Most businesses impacted are contractors and subcontractors in a supply chain. For example, a general builder who hires specialists such as roofers or electricians to complete a client project will usually receive reverse charge invoices from them. Those subcontractors, in turn, issue reverse charge invoices to the contractors they work for.

End users and intermediary suppliers

Some VAT and CIS registered businesses buy construction services for their own use rather than selling them on. A landlord or a business fitting out its own premises, for example, may be an end user. An intermediary supplier is a business connected to an end user, through an interest in the same land or the same corporate group, that passes the services on without material change.

These businesses can tell their supplier in writing that they are an end user or intermediary supplier. The supplier then charges VAT in the normal way. Without written notification, the reverse charge applies, so suppliers should ask customers to confirm their status rather than assume it.

The 5% disregard

Where reverse charge services make up 5% or less of the value of a contract, both parties can agree at the outset to apply normal VAT rules to the whole supply. The test uses the overall contract value, not individual invoices.

What services are excluded from reverse charge VAT?

The following services are outside the reverse charge when supplied on their own, even between construction businesses:

Professional work of architects, surveyors and building or design consultants.
Manufacturing or delivering materials, components, plant or machinery to site.
Installing seating, blinds and shutters.
Installing security systems, such as burglar alarms, CCTV and public address systems.
Signwriting and installing or repairing signboards and advertisements.
Purely artistic works, such as sculptures and murals.
Drilling for oil or gas, and mineral extraction.

Supplies of workers by employment businesses are also excluded.

What to put on a reverse charge invoice

A reverse charge invoice must make clear that the reverse charge applies and show the VAT due, or the rate, without adding it to the amount payable. HMRC accepts wording such as “Customer to pay the VAT to HMRC” or “S55A VATA 94 applies”.

Cash flow and VAT accounting

Subcontractors no longer receive VAT from their main customers, so they lose the working capital that VAT once provided. Many now reclaim more VAT on materials than they pay, which puts them in a regular repayment position. Submitting monthly VAT returns can speed up those repayments. The Cash Accounting Scheme cannot be used for reverse charge supplies or purchases.

Why is compliance so important?

HMRC took a light-touch approach to genuine mistakes in the early months of the reverse charge, but that period is now over. HMRC is now reviewing how businesses apply the rules in subcontracting chains, and errors can lead to assessments and penalties.

From 6 April 2026, contractors can also be held liable for lost tax, plus a penalty of up to 30%, where they knew or should have known that a transaction in their supply chain was connected to fraud. HMRC can remove the CIS “gross payment” status immediately in these cases, and a business must now wait five years before reapplying.

The errors we see most often are:

Charging VAT on an invoice where the reverse charge should apply.
Applying the reverse charge to zero-rated new-build work or to private homeowners.
Treating a customer as an end user without written confirmation.
Invoices that do not state clearly that the reverse charge applies.
Weak checks on subcontractors’ VAT and CIS status.

What to do now

Confirm and record the VAT and CIS status of every customer and subcontractor.
Ask customers for written end user or intermediary notifications and keep them on file.
Check that your invoicing and accounting software handles reverse charge entries correctly.
Review your supply chain due diligence in light of the April 2026 CIS changes.
Make sure finance and site teams can tell which supplies fall in and out of scope.

If you are unsure whether the reverse charge applies to your contracts, or want a review of your VAT processes before HMRC asks, contact one of our specialists using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information on this page is intended as a general guide only. While we work to keep our content accurate and up to date, we cannot guarantee that it reflects the position at the time you are reading it. No responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm. For more information on our editorial process, click here.

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