CIS Domestic Reverse Charge VAT: What Tradespeople Need to Know

This guide covers the domestic reverse charge specifically. For how CIS tax deductions work generally, see our CIS subcontractor guide.

What changed in March 2021?

HMRC introduced the Domestic Reverse Charge (DRC) for construction services on 1 March 2021, after two delays. The aim was to prevent VAT fraud in the supply chain — a scheme where a subcontractor charged VAT to a main contractor and then disappeared without paying it to HMRC.

Under DRC, the obligation to account for VAT shifts from the supplier (you, the subcontractor) to the customer (the contractor or main contractor you're working for). You no longer collect VAT on behalf of HMRC — the contractor does that job for themselves.

This is a significant change to how invoicing works for anyone subbying to a main contractor. Getting it wrong — either charging VAT when you shouldn't, or not charging it when you should — can cause problems on both sides of the transaction.

Who it applies to

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

• Both you (the supplier) and your customer are VAT-registered
• Your customer is registered under the Construction Industry Scheme (CIS)
• The services you're supplying fall within CIS — broadly, construction, alteration, repair, extension, demolition
• Your customer is not the end user (they intend to onward-supply the construction service)

In practice: if you're a subcontractor invoicing a main contractor for construction work, the reverse charge almost certainly applies.

Who it doesn't apply to

The reverse charge does not apply in these situations:

• Work for end-users:If you're invoicing a homeowner, landlord, or any business that is the final customer (not passing the work on), you charge VAT normally. The reverse charge is B2B only within the CIS supply chain.
• Your customer isn't VAT-registered:If the contractor isn't registered for VAT, the reverse charge doesn't apply — charge VAT as normal.
• Your customer has gross payment status:HMRC guidance says if the customer is an “end user or intermediary supplier” and tells you in writing, normal VAT rules apply.
• Zero-rated supplies:New build residential construction is already zero-rated — the reverse charge doesn't change that.
• You supply staff rather than construction services:Labour supply (e.g. agencies providing workers) isn't a construction service — normal VAT rules apply.

How to invoice correctly

Your invoice needs to show the net amount only, with no VAT added. It must include the statement that the reverse charge applies. HMRC requires specific wording — something like:

The invoice must state the VAT amount that would have applied — in this example £186.00 (20% of £930) — even though you're not collecting it. This tells the contractor exactly what to declare on their own VAT return.

How the customer accounts for it

As the contractor receiving a reverse charge invoice, you:

• Record the net amount as a purchase
• Add the VAT amount to Box 1 of your VAT return (output tax)
• Add the same VAT amount to Box 4 (input tax reclaim) — if you're fully taxable, these cancel out and you pay HMRC nothing extra
• Add the net amount to Box 7 (total purchases) and Box 6 (total sales)

For most fully-taxable contractors, reverse charge VAT is cash-flow neutral — the input and output cancel each other out. The key is that it's correctly declared.

Common mistakes

• Charging VAT when you should use reverse charge.The contractor then reclaims VAT you've charged but that HMRC never received — which creates a liability on your side.
• Not including the reverse charge statement on the invoice.HMRC requires explicit wording. “No VAT” without the statement isn't sufficient.
• Using reverse charge for work sold directly to end-users.You should be charging normal VAT to homeowners and businesses that aren't part of the CIS supply chain.
• Not checking if your customer is VAT-registered.If they're not, you must charge VAT as normal.
• Getting confused with the CIS tax deduction. The reverse charge is a VAT rule — entirely separate from CIS income tax deductions. You can be subject to both on the same invoice.

A worked example: plumber subbying to a main contractor

A self-employed plumber (VAT-registered) completes first-fix plumbing on a housing development. They invoice the main contractor (also VAT-registered and CIS-registered) for the work.

Without DRC (pre-March 2021): Plumber invoices £4,000 + £800 VAT = £4,800. Main contractor pays £4,800. Plumber declares £800 output VAT to HMRC on their return.

With DRC:Plumber invoices £4,000 net. Invoice states “Reverse charge — customer to account for VAT of £800 to HMRC.” Main contractor pays £4,000. Main contractor declares £800 output VAT and £800 input VAT on their own return — they cancel out. Plumber declares no output VAT on this supply.

The end result for HMRC is the same — but the cash flow is different. The plumber receives £800 less per invoice, and the main contractor handles the VAT. This is why some subcontractors find the DRC tightens their cash flow, particularly on larger jobs.