VAT domestic reverse charge: what it means for construction

Published Friday 7 November 2025

Table of contents

• What is the VAT domestic reverse charge for construction?
• When you must use the VAT domestic reverse charge
• Which construction services does the VAT reverse charge apply to?
• Which VAT rates does the VAT reverse charge apply to?
• Which construction services are exempt from the reverse charge?
• When did the VAT domestic reverse charge start?
• What does the VAT reverse charge for construction services mean for contractors?
• Is there a minimum threshold from which the VAT reverse charge for construction applies?
• How does Making Tax Digital for VAT affect the VAT reverse charge for construction?
• The Construction Industry Scheme and the VAT reverse charge
• Xero helps you manage your domestic reverse charge VAT
• FAQs on VAT domestic reverse charge for construction

Key takeaways

• Apply the VAT domestic reverse charge to all eligible construction transactions between VAT-registered businesses, regardless of contract value, when the customer is VAT-registered and the payment is reported within the Construction Industry Scheme.

• Implement cash flow management strategies by setting aside VAT amounts as you receive invoices, since you'll pay VAT quarterly to HMRC instead of upfront to suppliers.

• Ensure subcontractors issue invoices without VAT that clearly state "domestic reverse charge applies" and that you as the customer must account for the VAT yourself.

• Utilise MTD-compatible accounting software to digitally record all reverse charge transactions and automate DRC calculations, as Making Tax Digital requirements apply to all VAT-registered traders.

What is the VAT domestic reverse charge for construction?

VAT domestic reverse charge is a system where the buyer accounts for VAT instead of the supplier. In construction, this means contractors calculate and pay VAT directly to HMRC rather than receiving VAT-inclusive invoices from subcontractors.

The domestic reverse charge system offers these benefits:

• Fraud prevention: Reduces VAT carousel fraud in construction
• Simplified compliance: Streamlines VAT reporting between contractors and subcontractors
• Direct accountability: Main contractors handle all VAT calculations and submissions

Who must use the domestic reverse charge:

• VAT-registered contractors in the Construction Industry Scheme
• Main contractors receiving services from subcontractors
• All eligible construction transactions between VAT-registered businesses

How it works in practice:

• Subcontractors: Issue invoices without VAT
• Main contractors: Calculate VAT on received invoices
• VAT submission: Include reverse charge VAT in your VAT return
• Payment: Pay calculated VAT directly to HMRC

The domestic reverse charge affects most VAT-registered businesses in the Construction Industry Scheme. If you work in construction, check your reverse charge VAT responsibilities.

When you must use the VAT domestic reverse charge

You must use the domestic reverse charge for most supplies of building and construction services. The key conditions are when:

• your customer is registered for VAT in the UK
• the payment for the supply is reported within the Construction Industry Scheme (CIS)
• the services you supply are standard or reduced-rated
• your customer has not given you written confirmation that they are an end user or intermediary supplier

If all these conditions are met, apply the reverse charge. If your customer is not VAT registered, charge VAT in the normal way.

Which construction services does the VAT reverse charge apply to?

The VAT domestic reverse charge applies to most services involved in construction. Even if there is only a single reverse charge element in a supply chain, the whole supply is subject to the domestic reverse charge.

Construction services covered by domestic reverse charge:

• Building work: Construction, alteration, repair, extension, and demolition
• System installation: Heating, fire protection, lighting, and security systems
• Finishing services: Cleaning and decorating during construction phases
• Supporting services: Any work required to complete the above activities

For the complete list, see the full list of construction services covered by the domestic reverse charge.

Which VAT rates does the VAT reverse charge apply to?

The VAT Domestic Reverse Charge applies to construction services that are subject to both standard-rate (20%) and reduced-rate (5%) VAT. It does not apply to any zero-rated or exempt supplies.

The value of any reverse charge services does not count towards the VAT registration threshold.

Which construction services are exempt from the reverse charge?

HMRC makes some exemptions from the VAT reverse charge within the construction industry.

Common DRC exemptions are:

• Professional services of architects and surveyors
• Drilling for oil or natural gas
• Manufacture of building components, such as machinery and utility systems

If you supply services to the end user (such as the property owner) or directly to a main contractor who sells or lets a newly completed residential building, the domestic reverse charge does not apply – standard VAT rules apply instead.

When did the VAT domestic reverse charge start?

The domestic reverse charge came into effect on 1 March 2021. Before this date, suppliers accounted for VAT themselves.

What does the VAT reverse charge for construction services mean for contractors?

Cash flow impact: You pay VAT to HMRC quarterly instead of paying it upfront to suppliers. This changes when VAT leaves your business, affecting your cash flow.

Preparation strategies:

• Cash reserves: Set aside VAT amounts as you receive invoices
• Accurate tracking: Record all reverse charge transactions immediately
• Software integration: Use accounting systems that automate DRC calculations
• Regular monitoring: Check VAT liabilities throughout each quarter

Key benefit: You keep VAT money longer before making quarterly payments to HMRC, which helps your cash flow.

To stay on track with your VAT return, check throughout the construction process that you treat all supplies and purchases correctly under domestic reverse charge rules.

Is there a minimum threshold from which the VAT reverse charge for construction applies?

No minimum threshold applies to the VAT domestic reverse charge. Every eligible construction transaction requires domestic reverse charge treatment, regardless of contract value.

Practical impact:

• Small jobs: £100 repair work needs reverse charge treatment
• Large projects: £1 million contracts follow the same rules
• All transactions: Consistent DRC application across all contract sizes

How does Making Tax Digital for VAT affect the VAT reverse charge for construction?

have applied to all VAT-registered traders since April 2022. These requirements do not change how the domestic reverse charge works, but they do change how you record it.

Digital record requirements:

• All transactions: Record every reverse charge transaction digitally
• Invoice details: Show VAT amount or VAT rate for DRC transactions
• Software compliance: Use MTD-compatible software for all VAT records

Supplier requirements:

• Clear invoicing: Request invoices that clearly identify DRC transactions
• VAT indication: Invoices must show "domestic reverse charge applies" or similar
• Rate specification: Include VAT rate when exact amount can't be shown

The Construction Industry Scheme and the VAT reverse charge

The Construction Industry Scheme (CIS) works alongside the domestic reverse charge to help ensure that workers in the construction industry report VAT correctly. DRC applies to all eligible transactions reported under CIS between VAT-registered contractors and subcontractors.

To keep this process smooth, make sure you complete all compliance checks and keep clear records. The main contractor must check that all incoming invoices correctly identify where the VAT reverse charge applies, then account for the VAT themselves and report it in their VAT return.

Xero helps you manage your domestic reverse charge VAT

You need to account for the domestic reverse charge correctly throughout the construction process to stay compliant.

Xero accounting software for construction businesses helps you manage your domestic reverse charge VAT. It automates domestic reverse charge calculations and lets you send VAT returns directly from Xero, so you can focus on your business.

Now you know the basics of the domestic reverse charge, you can learn more about accounting for reverse charge VAT.

Try Xero for free today to get started.

FAQs on VAT domestic reverse charge for construction

Here are answers to common questions about the VAT domestic reverse charge for construction.

What is the 5% rule for VAT reverse charge?

If the part of the supply subject to the reverse charge is 5% or less of the total value, you can disregard it. This is called the '5% disregard'. It lets a business customer issue an end user declaration. In this case, you can apply normal VAT rules to the whole supply.

What happens if I apply the reverse charge incorrectly?

HMRC may charge penalties for mistakes, but they may be lenient for genuine errors. For example, HMRC said it would apply a light touch in the first six months of the new rules, especially if you can show you have processes in place to comply. Correct any errors on your next VAT return as soon as you find them.

How do I show reverse charge VAT on invoices?

Your invoice must clearly state that the domestic reverse charge applies and that the customer must account for the VAT. VAT regulations require you to add the 'reference ‘reverse charge’' to the invoice. Do not include VAT in the amount payable by the customer. You can show how much VAT is due under the reverse charge, or the rate of VAT.

Can I reclaim input VAT on reverse charge transactions?

Yes. When you account for the reverse charge as a customer, record the VAT amount as both output tax (money owed to HMRC) and input tax (VAT you can reclaim). For most businesses, these entries cancel each other out. You can reclaim the input tax if you meet the normal rules.