The VAT domestic reverse charge is a tax measure introduced in the UK on 1st March 2021 to tackle VAT fraud in the construction sector. Instead of the supplier charging VAT on their invoice, responsibility for accounting for VAT shifts to the buyer (contractor). This means subcontractors no longer include VAT on their invoices—the contractor must declare and reclaim it themselves through their VAT return.
Who Does the VAT Domestic Reverse Charge Apply To?
The reverse charge applies to most standard and reduced-rate VAT services within the construction industry where:
- Both the supplier and buyer are VAT-registered in the UK.
- The work falls within the scope of the Construction Industry Scheme (CIS).
When Must You Use the VAT Domestic Reverse Charge?
This VAT procedure applies to a wide range of construction-related services, including but not limited to:
- Building and structural work – constructing, altering, repairing, extending, demolishing, or dismantling buildings, including offshore installations.
- Infrastructure projects – work on roads, power lines, water mains, railways, docks, pipelines, and land drainage systems.
- Mechanical and electrical installations – fitting heating, lighting, air-conditioning, ventilation, drainage, sanitation, and fire protection systems.
- On-site preparation and finishing – excavation, site clearance, foundation laying, scaffolding erection, and landscaping.
- Decorating and final touches – internal and external painting or decorating as part of a construction project.
The charge does not apply to professional services such as architecture, surveying, consultancy, or hiring of workers—these remain subject to normal VAT rules.
How Does the Reverse Charge Work in Practice?
Instead of charging VAT on their invoices, subcontractors must state that the domestic reverse charge applies. The buyer (contractor) must then:
- Calculate the VAT themselves and record it in their VAT return as both output tax (as if they had charged it) and input tax (as if they had paid it).
- Ensure they only apply the reverse charge when working with another VAT-registered business under CIS—it does not apply to end users or consumers.
- Keep accurate records to ensure compliance with HMRC requirements.
Why Was the Reverse Charge Introduced?
The government introduced the VAT domestic reverse charge to reduce VAT fraud in the construction industry, where some subcontractors would charge VAT but fail to pass it on to HMRC. By shifting VAT responsibility to contractors, the risk of fraud is minimised.
Read our full guide on accounting for value added tax (VAT) to learn more.
If you need help with this, or with other advice, then please get in touch with our accounting team.