Since 1 March 2021, most VAT-registered subcontractors working under the Construction Industry Scheme haven't charged VAT to their customers at all on standard CIS work, and a lot of invoices in this sector still get it wrong, in both directions. Some subcontractors are still adding VAT to invoices that should carry none. Some end-user customers are being reverse-charged when normal VAT rules should apply to them instead. Both mistakes cause real problems: the wrong VAT return, an invoice HMRC can query, or a customer who's paid VAT they were never supposed to be charged.
What the reverse charge actually does
Under normal VAT rules, the supplier charges VAT, collects it from the customer, and pays it to HMRC; the customer separately reclaims it as input VAT if they're entitled to. The domestic reverse charge removes the supplier from that chain entirely for the specified transactions it covers. The customer, not the supplier, accounts for both sides: they declare the VAT as output tax in box 1 of their own return, and simultaneously reclaim the same amount as input tax in box 4 (subject to their normal recovery position). No VAT cash changes hands between the two businesses at all.
The reason this exists is fraud prevention. Before the reverse charge, "missing trader" fraud in construction supply chains worked by a subcontractor charging VAT, being paid it, and disappearing before ever remitting it to HMRC. Removing the cash flow of VAT between CIS businesses closes that route off.
When it applies
The reverse charge applies to standard or reduced-rated "specified services" as defined under CIS (most building and construction operations), supplied between two VAT-registered, CIS-registered businesses, where the customer intends to sell on or use the supply to make a further onward supply of construction services. Zero-rated supplies are excluded; the reverse charge only has anything to reverse-charge when there's actually VAT involved.
The exclusion almost everyone gets wrong: end users
The reverse charge does not apply where the customer is an "end user": broadly, someone receiving the construction service for their own purposes rather than to supply construction services onward. A property developer having their own office built is an end user. So is an intermediary supplier connected to an end user, such as a landlord commissioning work for a tenant. In both cases, normal VAT rules apply: the supplier charges VAT as usual.
HMRC's default assumption, if nothing is confirmed either way, is that the customer is not an end user, meaning the reverse charge applies unless told otherwise. This is why end users and intermediary suppliers are expected to give their contractor a written statement confirming their status. Without that confirmation in hand, a subcontractor is generally right to assume reverse charge applies and treat the invoice accordingly, but it's exactly the kind of assumption that goes unchecked and gets flipped later when the customer's actual status comes to light.
⚠️ No written end-user confirmation on file means assume reverse charge applies. This is the single most common source of CIS VAT errors: an end user who never sent the confirmation, and a subcontractor who charged VAT normally because nobody thought to ask. Get the written statement before invoicing, not after.
The 5% disregard
Where a contract is a mix of reverse-charge and non-reverse-charge supplies, and the reverse-charge element makes up 5% or less of the total value, the whole supply can be treated under normal VAT rules for simplicity: HMRC doesn't expect invoices to be split for a genuinely small proportion of mixed work.
What the invoice has to say
A reverse charge invoice still has to show the VAT rate and the amount of VAT that would have applied, for the customer's own accounting purposes, but that VAT amount is not added to the total the customer is charged. Instead, the invoice needs wording along the lines of:
"Reverse charge: customer to account for the VAT to HMRC."
| Labour and materials (net) | £50,000 |
| VAT shown (not charged, for reference) | £10,000 |
| Total invoiced to customer | £50,000 |
| Customer's own VAT return: | |
| Output VAT self-accounted (box 1) | +£10,000 |
| Input VAT reclaimed (box 4) | −£10,000 |
The cash flow sting subcontractors underestimate
Before the reverse charge, a VAT-registered subcontractor effectively held their customers' VAT for up to three months between collecting it and paying it over to HMRC: a genuine, if temporary, cash flow buffer. Reverse charge work removes that entirely, since no VAT is ever collected from the customer in the first place. Combined with input VAT still being reclaimable on materials and overheads as normal, many subcontractors doing mostly reverse-charged work end up in a persistent net-repayment position: HMRC owes them money every quarter rather than the other way round.
✓ Consider monthly VAT returns. If reverse charge work has put your business into a regular repayment position, filing monthly rather than quarterly gets that VAT back from HMRC faster, a straightforward cash flow improvement that costs nothing beyond the extra return.
What to check on every contract
- Are both parties VAT and CIS registered? If either isn't, the reverse charge doesn't apply
- Is the customer an end user or intermediary supplier connected to one? If so, get their written confirmation and charge VAT normally
- Is the reverse-charge element of a mixed contract 5% or less? If so, the whole thing can be treated normally
- Does the invoice carry the correct wording, and does the total exclude the VAT shown for reference?
💡 Rooby tip: Rooby lets accountants flag which clients are subject to the CIS domestic reverse charge directly on the client record, so their VAT calculation reflects the different accounting treatment rather than assuming standard invoice-based VAT for construction clients it doesn't apply to in the same way.
Reverse charge VAT isn't difficult once the end-user distinction is clear on every contract: it's the assumption, made once and never revisited, that causes most of the errors that show up months later.
Rooby tracks which clients sit under the CIS domestic reverse charge and calculates their VAT position accordingly, alongside every other tax liability synced from Xero.