Understanding the VAT reverse charge in the construction sector

The VAT reverse charge has been a talking point in the construction sector for a while now. If you’re a contractor or subcontractor, you might have heard about it at trade shows, on industry forums or perhaps over a quick brew with colleagues. The rules apply for the 2025/26 tax year and directly affect invoices, payments and how you manage your accounts. In this blog, we explain what the VAT reverse charge is, who needs to follow it and how it influences your cashflow. We’ve also packed in some practical tips on compliance and record-keeping to help you stay on top of everything.

According to the Office for National Statistics (ONS), the construction industry contributed around £139bn to the UK economy in 2023. With such a big slice of the national pie, the government wants to make sure VAT is paid correctly. That’s where the VAT reverse charge comes in. Let’s see how it all works, shall we?

What is the domestic VAT reverse charge?

The domestic VAT reverse charge for building and construction services shifted the responsibility for accounting for VAT from the supplier (usually the subcontractor) to the customer (often the main contractor). Instead of you charging and collecting VAT on services you supply, you show that VAT as “reverse charge” on the invoice, and the main contractor (if they’re VAT-registered and meet the relevant criteria) must account for it on their own VAT return.

You might wonder why HMRC introduced this. It’s a measure to reduce VAT fraud. By making the customer responsible for reporting the VAT, there’s less risk of “missing trader” activity. This change first came into effect on 1 March 2021 and continues into 2025/26.

Who does it apply to?

The VAT reverse charge applies if:

• you’re a VAT-registered business in the UK supplying or receiving construction services
• the services you provide fall within the scope of the Construction Industry Scheme (CIS)
• neither you nor your customer is exempt from VAT, and the customer isn’t an end-user or intermediary supplier.

For 2025/26, your business must still be VAT-registered if you exceed the annual threshold of £90,000 in taxable turnover. Keep an eye on your sales to ensure you don’t accidentally tip over this threshold without realising. If you’re unsure whether your services or clients fall within these rules, get in touch with us or head over to the official Companies House website for general guidance on running a construction business.

How does it affect invoices and payments?

This is where the cashflow side of things really comes into play. Under the VAT reverse charge, as a subcontractor you’ll no longer charge VAT on certain invoices. Instead, you note that the service is subject to the reverse charge, and the amount of VAT is calculated but not added to the invoice total. The main contractor then includes that VAT on their own return rather than paying it to you.

From a purely financial perspective, you won’t receive the VAT portion on these invoices, which might lead to less money in the bank at first glance. On the flip side, you also won’t be paying that output VAT to HMRC. It means your VAT returns might show lower output tax.

However, if you’ve been relying on the VAT you charge as a form of working capital, you’ll need to adapt. The best way to avoid a nasty surprise is to review your budgets and project cashflows. If you’re not 100% sure how this might look for your business, we can help you plan. Check our services for construction clients and see how we support contractors and subcontractors with managing VAT efficiently.

Record-keeping and compliance tips

You need clear records to stay compliant with the VAT reverse charge. Here are a few handy steps.

1. Check if your customer is VAT-registered and within CIS: Keep an up-to-date list of your regular clients with their VAT registration numbers and CIS status.
2. Mark invoices clearly: Always show if the reverse charge applies. Use wording like “VAT reverse charge: Customer to pay the VAT to HMRC” or similar.
3. Reconcile regularly: Keep track of which invoices should have VAT reverse charge and which do not. Make sure your accounting software or spreadsheets flag these transactions.
4. Review sub-contractor statements: If you’re the main contractor, ensure you’re correctly accounting for VAT on invoices you receive.
5. Keep staff in the loop: If you have a team, train them on the new invoicing rules. This will help avoid confusion and save time in the long run.

If you already have a bookkeeper or in-house accounts person, it’s worth double-checking that they’re fully up to speed. Some software packages now offer built-in reverse charge features – which is a big help when you’re trying to reduce mistakes. We can also advise on the best accounting tools that integrate with your everyday workflow.

Common issues to watch out for

Even though the VAT reverse charge is designed to be straightforward, we see a few common hiccups, such as the following.

1. Applying it to zero-rated or exempt services: The reverse charge only applies to standard or reduced-rated supplies. If a service is zero-rated or exempt, you don’t need to do the reverse charge.
2. Incorrectly charging VAT on reverse charge invoices: Some subcontractors keep charging VAT by accident. If not corrected, this can lead to confusion, overpayments and potential penalties.
3. Mixing end-users with reverse charge: If your customer is an end-user (for example, a property owner who won’t make onward supplies of construction services), you shouldn’t apply the reverse charge.
4. Forgetting to check new clients: Always verify a new client’s VAT and CIS status before deciding whether to apply the reverse charge. Don’t just assume it’s the same as your previous customers.

Practical tips for the 2025/26 tax year

The 2025/26 tax year follows the same structure for the VAT reverse charge, so expect the same rules to continue. However, it’s always wise to keep an eye on announcements from HMRC about any changes. In the meantime here are some pointers to bear in mind.

• Budget for the change in cashflow: If you relied on VAT receipts for short-term funding, consider alternative financing or build up a small reserve.
• File your returns on time: Late returns could lead to penalties, and with the reverse charge, you really don’t want any confusion or backlog.
• Stay informed: HMRC updates its guidance pages periodically. Bookmark the official VAT reverse charge details so you’re always in the know.

Should you need professional advice on VAT, payroll or any of the day-to-day responsibilities of running a construction business, we offer tailored support to make your life a bit easier.

Key takeaways

The VAT reverse charge isn’t out to trick you, but it can catch you off guard if you’re unprepared. Once you understand how it works and keep your invoicing in line with HMRC’s requirements, you’ll find it relatively simple to manage. The key is to be consistent, double-check who you’re dealing with and review your records regularly.

We’d be happy to help you work through any questions about the VAT reverse charge and how it affects your cashflow or general accounts. Contact us for a friendly chat or a more detailed plan. We can guide you through the 2025/26 tax year and beyond – and help you keep your construction business running smoothly.