The domestic reverse charge is one of those rules that sounds more complicated than it is, right up until you invoice the wrong way and either overcharge a client or accidentally hand HMRC VAT you never needed to. Here's the mechanism in plain terms.
The problem it was designed to solve
Before the reverse charge existed, a small number of construction businesses would charge VAT to their customers, collect it, and then disappear without ever paying it on to HMRC ("missing trader fraud"). The reverse charge closes that loophole for VAT-registered construction supply chains by changing who actually hands the VAT to HMRC.
How it normally works, vs. how the reverse charge works
Normally, a VAT-registered supplier charges VAT on an invoice, the customer pays the gross amount (including VAT), and the supplier pays that VAT over to HMRC.
Under the domestic reverse charge, the supplier still shows VAT on the invoice for information, but doesn't charge it or collect it. Instead, the customer accounts for that VAT directly on their own VAT return, both as output tax (what they owe) and input tax (what they can reclaim), which in most cases cancels out. The cash for VAT never changes hands between supplier and customer at all.
Who it applies to
Broadly, the reverse charge applies when all of the following are true:
- The supply is standard-rated or reduced-rated construction services covered by CIS.
- Both the supplier and the customer are VAT-registered.
- The customer isn't the "end user" (i.e. they're going to use the work as part of a further supply of construction services, not as the final customer, like a homeowner or a business having work done on its own building).
If the customer is the end user, or isn't VAT-registered, normal VAT rules apply instead and you invoice as usual.
What this actually changes on your invoices
If you're a subcontractor supplying reverse charge services, your invoice needs to make clear that the reverse charge applies and that the customer must account for the VAT, rather than showing an amount for the customer to pay you. Getting this labelling wrong is one of the most common invoicing errors we see.
If you're a contractor receiving reverse charge supplies, you don't pay the VAT shown on the subcontractor's invoice. You account for it yourself on your VAT return instead.
Why it matters for cash flow
For subcontractors used to VAT cash sitting in their account between invoicing and their VAT return, the reverse charge removes that buffer, since you're no longer collecting VAT you'll later pay over. It's a smaller change in substance than it feels day-to-day, but it's worth planning for if you've relied on that timing gap in the past.
Getting it right
The reverse charge itself is a fairly mechanical rule, but applying it correctly depends on knowing your customer's VAT and end-user status for every job, not just assuming. When in doubt, ask the customer directly and get it in writing.
Rehan Razzaq, FCCA
ACCA Chartered Certified and a Xero Certified Advisor, helping UK construction businesses with accounts, tax and financial planning.
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