1. Introduction
VAT is complicated at the best of times — but in construction, it becomes a maze of subcontractors, CIS rules, mixed supplies, and different VAT rates. When the Domestic Reverse Charge (DRC) was introduced in 2021 to reduce VAT fraud, it added yet another layer for contractors to navigate.
Even today, many construction businesses are unsure when the reverse charge applies, what wording to use, and how it affects their VAT returns. The consequences can be serious: incorrect invoices, unexpected cash flow issues, payment delays, and in some cases, HMRC penalties.
At Hammond & Co, we deal with these issues every week. The good news? With the right understanding and systems, VAT doesn’t need to cause stress. This guide explains the reverse charge in plain English, highlights common mistakes, and shows how expert support keeps your VAT accurate and compliant.
2. What Is the VAT Reverse Charge (The Simple Version)?
The Domestic Reverse Charge shifts the responsibility for reporting VAT from the supplier (subcontractor) to the customer (contractor).
Under normal VAT rules:
- The supplier adds VAT to their invoice, collects it, and pays it to HMRC.
Under the reverse charge:
- The supplier does not charge VAT.
- The customer records both output VAT and input VAT on their VAT return.
In summary:
- The subcontractor doesn’t handle VAT at all.
- The contractor accounts for both sides of the VAT on their return.
- HMRC receives the same total VAT — but without cash moving between businesses.
The reverse charge applies when:
- The work is standard-rated or reduced-rated construction services within CIS.
- Both supplier and customer are VAT-registered and working within CIS.
It does not apply:
- When the customer is an end user (e.g., homeowner or property owner using the building themselves).
- For zero-rated works (e.g., new builds).
- If the customer is not VAT-registered.
If both parties are VAT-registered and the work falls under CIS, the reverse charge likely applies — but getting professional confirmation is always advisable.
3. Common Situations Explained
Scenario 1 — Subcontractor Working for a Main Contractor
You install electrics in a commercial building for a main contractor.
- Both parties are VAT-registered.
- Work falls under CIS.
✅ Reverse charge applies.
Your invoice should state:
“Reverse charge: Customer to account for VAT to HMRC under the Domestic Reverse Charge for Construction Services.”
Scenario 2 — Builder Working for a Domestic Client
You build an extension for a residential homeowner.
- Customer is not VAT-registered.
❌ Reverse charge does not apply.
Charge VAT as usual.
Scenario 3 — Subcontractor Working for a Developer Who Will Keep the Property
You fit kitchens for a developer who plans to rent out the flats.
- Developer is classed as an end user.
❌ No reverse charge.
Charge VAT as normal.
Scenario 4 — Labour and Materials Together
If labour is the primary part of the job and materials are incidental, reverse charge usually applies.
If it’s genuinely a supply of goods (materials are the majority), normal VAT rules apply.
Getting this distinction right avoids future HMRC challenges.
4. The Most Common VAT Mistakes Contractors Make
Even experienced firms fall into these traps:
1. Adding VAT when the reverse charge should apply
Contractors then reject invoices and request corrections — delaying payment.
2. Not charging VAT when the reverse charge does not apply
Some businesses assume “everything is reverse charge,” which causes under-declared VAT.
3. Incorrect or missing invoice wording
HMRC requires specific wording. Without it, audits become messy.
4. Confusion in long supply chains
If one party applies reverse charge incorrectly, it can disrupt the entire chain.
5. Claiming VAT that was never actually paid
A major red flag to HMRC.
6. Ignoring cash flow impacts
Subcontractors lose the short-term VAT “buffer” they once had — which can strain cash flow without planning.
5. The Financial Impact of VAT Errors
Getting VAT wrong can be costly:
- HMRC penalties (often 15–30% plus interest)
- Contractors refusing payment until invoices are corrected
- Cash flow delays while corrections are made
- Damage to professional reputation
We’ve seen businesses lose thousands due simply to missing or incorrect VAT wording.
6. How Hammond & Co Helps Contractors Stay VAT-Compliant
Working with a construction-savvy accountant gives you clarity and protection. At Hammond & Co, we provide:
✓ Contract & Project Reviews
We determine whether the reverse charge applies before you invoice.
✓ Price & Quote Accuracy
We help you price jobs correctly with the right VAT treatment.
✓ Correct Invoice Templates
We set up Xero, QuickBooks, and Word templates with the required HMRC wording.
✓ VAT Quarter Planning
We help you manage cash flow around VAT deadlines.
✓ Labour vs Materials Assessment
We ensure your VAT position matches the true nature of each job.
✓ Training for Office & Admin Teams
We teach staff to recognise reverse charge situations instantly.
✓ Real-Time Bookkeeping
With up-to-date Xero records, issues are spotted early — not months later.
In short: we make VAT simple, accurate, and stress-free.
7. Systems That Keep VAT Running Smoothly
We use industry-leading tools to automate and streamline VAT processes:
- Xero — Reverse charge VAT codes applied correctly and consistently.
- Dext / Hubdoc — Ensures supplier invoices enter Xero with the right VAT status.
- BrightPay — Integrates with CIS data.
- MTD-compliant filing — Ensures submissions meet HMRC requirements.
This creates a clean, reliable, digital audit trail — essential if HMRC ever reviews your business.
8. Case Study: Fixing Reverse Charge Errors (Example)
A fictional example illustrates the impact:
“BuildPro Services Ltd” came to us after an HMRC review showed their accountant had treated all invoices as reverse charge — even for homeowners and end users.
Issues discovered:
- £18,000 under-declared VAT
- Penalty and interest notices issued
- Contractors delaying payment awaiting corrected invoices
What we did:
- Reviewed all projects to identify correct VAT treatment
- Amended invoices and resubmitted returns
- Negotiated with HMRC, reducing penalties to zero
- Implemented proper VAT codes and staff training
- Set up new processes in Xero
Outcome:
- Penalties removed
- No further errors
- Client feedback:
“For the first time, VAT actually makes sense.”
9. Hammond & Co’s VAT Support for Construction Businesses
Our tailored VAT service includes:
- VAT Health Check — Identifying risk areas
- Reverse Charge Mapping — Clear guidance for each customer and supplier
- Pre-Quote VAT Advice — Ensuring you price correctly
- Quarterly VAT Reviews — Ensuring CIS and VAT align
- Month-9 Tax Planning — Avoiding last-minute surprises
- HMRC Support — We speak to HMRC on your behalf
We’re here to protect your business — not just file returns.
10. Quick Checklist for Contractors
Before invoicing, confirm:
Is the customer VAT-registered?
Are both parties under CIS?
Is the work within CIS scope?
Is the customer an end user?
Correct wording for reverse charge invoices:
“Reverse charge: Customer to account for VAT to HMRC under the Domestic Reverse Charge for Building and Construction Services.”
Also:
- Keep evidence of VAT registration.
- Assess materials vs labour carefully.
- Keep digital records (MTD requirement).
- Ask for professional advice if unsure.
11. Conclusion
VAT in construction is complex — and the Domestic Reverse Charge hasn’t made it any easier. But with the right accountant in your corner, you can stay compliant, avoid costly errors, and keep cash flow stable.
At Hammond & Co, we specialise in supporting contractors, subcontractors, and developers with clear, accurate VAT guidance backed by construction-specific expertise and smart digital systems.
If you’re unsure whether you’re applying VAT correctly — or worried you may have been doing it wrong — we can help.
Need clarity with VAT?
Let’s get it sorted.