What is the domestic reverse charge?

If you work in the construction sector, you’ll need to be aware of the domestic reverse charge and its impact on how you handle your VAT. Introduced in March 2021, this important process is designed to tackle VAT fraud in the industry by making VAT the responsibility of the customer, rather than the supplier.

But when does it apply exactly? Is there a threshold, and which services does it include? Here, we answer all your questions on the domestic reverse charge and offer a useful example to explain how it works in practice.

What is a domestic reverse charge?

The domestic reverse charge (VAT) is a mechanism that guides how VAT is handled in the UK construction industry. Instead of the supplier charging and accounting for VAT and paying it to HMRC, they invoice the net amount, and the customer accounts for VAT through their VAT return.

It’s like passing the VAT baton — or, as the name suggests, reversing the way VAT is typically handled.

When does the domestic reverse charge apply?

The domestic reverse charge applies to most B2B building and construction services between VAT-registered businesses in the UK’s Construction Industry Scheme (CIS).

It comes into effect when all of the following conditions are met:

• The service is within the scope of the CIS
• Both the supplier and the customer are VAT-registered
• The customer is CIS-registered
• The supply isn’t to an end user or intermediary supplier
• The supply isn’t zero-rated for VAT

The domestic reverse charge doesn’t apply if you're supplying services to consumers, or a party involved in the sale isn’t VAT registered. It also only applies to certain services, which we’ll explore more in a moment.

Is there a threshold for domestic reverse charge?

It’s a common misconception that the reverse charge only applies to large contracts or that there’s a minimum contract value — this is not true.

There isn’t a minimum threshold for the domestic reverse charge. Whatever your total, if you meet all the conditions above, you must apply the reverse charge.

An important point to check is whether your customer is VAT registered. If you suspect they aren’t, perhaps because their turnover is below the VAT registration threshold (currently £85,000), then the reverse charge won’t apply. In this case, you would charge VAT as normal.

Always check your customer’s VAT status before issuing an invoice. Even small jobs can fall under the reverse charge requirements, and getting it wrong can cause headaches for both parties. If you make a mistake and charge VAT when you shouldn’t have (or vice versa), you’ll need to correct it by issuing a credit note and new invoice.

Read more: HMRC has a useful and in-depth VAT domestic reverse charge technical guide if you need to drill into the details

What is the difference between CIS and domestic reverse charge?

While both CIS and the domestic reverse charge affect the construction industry, they serve different purposes and handle different types of payments.

The CIS is all about deducting tax from payments for construction work. It’s essentially a tax withholding system where contractors deduct money from subcontractors’ payments to cover their income tax and National Insurance contributions. Think of CIS as managing the subcontractor’s personal tax obligations.

The domestic reverse charge, on the other hand, is purely about VAT. It changes who’s responsible for accounting for VAT on construction services — shifting this responsibility from the supplier to the customer. The domestic reverse charge has nothing to do with income tax or National Insurance; it’s strictly about managing VAT payments.

Which services fall under the domestic reverse charge?

The domestic reverse charge applies to a wide range of construction services, but there are some exclusions.

The following services are included:

• Constructing, altering, repairing, or demolishing buildings and structures
• Groundworks and excavating
• Installing heating systems, air conditioning, ventilation, and electrical systems
• Cleaning the interiors of buildings and structures during construction
• Painting and decorating buildings and structures
• Plastering, floor and wall tiling, and other internal surface finishes
• Site clearance and preparation
• Installing windows, doors, and similar fittings

The following services are not included:

• Professional services from architects, surveyors, or consultants
• Installing security systems, including burglar alarms and CCTV
• Installing carpets or other soft floor coverings
• Landscape gardening and planting
• Drilling for oil or natural gas
• Artistic works like sculptures or murals
• Signwriting and installing signboards

If you’re unsure whether a service falls under the DRC, ask yourself, “Is this work typically done by construction businesses?” If the answer is yes, it’s likely included. You can also find more information on the gov.uk website that details when you must use the VAT domestic reverse charge.

Remember that even if a service is on the “included” list, the reverse charge only applies if both the supplier and customer are VAT registered and the customer is CIS registered.

What is an example of a reverse charge?

Let’s walk through a practical example of how the domestic reverse charge works in the real world.

Imagine Smith Construction is hiring Jones Electrical Services to rewire an office building. The electrical work costs £20,000, and both companies are VAT and CIS registered.

Hypothetically, if the reverse charge did not come into effect:

• Jones Electrical would invoice for £20,000 + £4,000 VAT (20%)
• Smith Construction would pay £24,000 in total
• Jones Electrical would receive £24,000 and later pay the £4,000 VAT to HMRC
• Smith Construction would reclaim the £4,000 VAT through their VAT return

However, with the reverser charge in place:

• Jones Electrical invoices for £20,000 only
• They note on the invoice "Reverse charge: Customer to pay VAT to HMRC"
• Smith Construction pays only £20,000 to Jones Electrical
• Smith Construction then:
  • Records £4,000 VAT as output tax (what they owe HMRC)
  • Also records £4,000 VAT as input tax (what they can reclaim)
  • These two entries effectively cancel each other out

This system removes the movement of VAT money between the companies, reducing the risk of VAT fraud while simplifying the process for subcontractors.

How do I invoice for the domestic reverse charge?

Creating a domestic reverse charge invoice isn’t a complicated process. Your invoice must show all the usual information required for a VAT invoice, but with some crucial differences.

The invoice must clearly state:

• That the domestic reverse charge applies by using the phrase: “Reverse charge: VAT Act 1994 Section 55A applies”
• That the customer must account for the VAT
• The amount of VAT the customer needs to account for (even though you’re not charging it)

For example, if you’re charging £20,000 for construction services, your invoice should:

• Show the £20,000 net amount
• Indicate that VAT at 20% would be £4,000
• Make clear that this £4,000 VAT should be accounted for by the customer
• Not include the VAT amount in the total to pay

How do I account for domestic reverse charge in my VAT return?

The way you handle the reverse charge in your VAT return depends on whether you’re the supplier or the customer. The VAT return form (VAT100) has nine boxes that are used in the following ways.

If you’re the supplier:

• Include the net value of the reverse charge supply in box 6 (total value of sales)
• Don’t include any VAT in box 1 (VAT due on sales)
• Make a note that these sales were reverse charge supplies in your VAT records
• Remember, you’re not collecting or paying any VAT on these transactions

If you’re the customer:

• Include the net value of the purchase in box 7 (total value of purchases)
• Include the VAT amount in box 1 (as if you charged yourself the VAT)
• Include the same VAT amount in box 4 (reclaiming the VAT)
• The net effect on boxes 1 and 4 usually cancels out if you can reclaim all the VAT

To help you, many accounting software packages now have specific features for handling reverse charge transactions. They’ll automatically populate the correct boxes in your VAT return, reducing the risk of errors.

Quickfire summary: Domestic reverse charged explained

The domestic reverse charge shifts the responsibility for reporting and paying VAT from the supplier to the customer in UK construction services. It means that suppliers issue invoices without VAT and customers account for the VAT directly to HMRC.

Navigating the domestic reverse charge might seem daunting at first, but once you understand the basics, it’s a pretty straightforward process.

Whether you’re a supplier who needs to adjust your invoicing or a customer who needs to account for VAT differently, keeping clear records and understanding your obligations is essential. If you’re ever unsure about how to handle a specific situation, it’s always worth speaking to your accountant or HMRC directly. Getting it right from the start is far easier than correcting mistakes later.

Also read:

• Buying a non-standard construction house: What you need to know
• Built to last: Insurance essentials for joinery businesses
• SMEs under Labour: Boom or bust?

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