HMRC Domestic Reverse Charge VAT Check For Construction

The domestic reverse charge for construction services shifts responsibility for accounting for VAT from the supplier to the customer on certain specified construction services supplied between VAT-registered businesses that are also registered under the Construction Industry Scheme. Instead of the supplier charging VAT and the customer reclaiming it, the customer self-accounts for both the output tax and, where entitled, the corresponding input tax on their own VAT return.

The rule was introduced specifically to counter missing trader VAT fraud in construction supply chains, where a supplier charges VAT, is paid by the customer, and then disappears without paying that VAT to HMRC. Because the reverse charge removes the VAT cash flow between supplier and customer, HMRC checks compliance closely given the fraud risk the rule was designed to address.

The reverse charge applies to specified construction services, broadly matching the categories covered by the Construction Industry Scheme, supplied by a VAT-registered subcontractor to a VAT-registered contractor, where both are also registered for CIS and the supply is not zero-rated. It does not apply where the customer is an End User, meaning they use the building or construction work for their own purposes rather than selling on the construction service, or an Intermediary Supplier connected to an End User, provided the correct notification is given.

HMRC frequently finds confusion around this End User exclusion: a business receiving construction services for its own premises should tell its supplier in writing that it is an End User, so that normal VAT rules apply instead of the reverse charge, but this notification is sometimes missed or given late.

Mixed supplies, where a contract includes both reverse charge and normal-rated elements, also cause difficulty. HMRC's guidance allows the whole supply to be treated under the reverse charge in some circumstances if only a minor proportion falls outside it, but this needs to be checked against the specific facts rather than applied as a general assumption.

HMRC typically requests contracts, invoices and correspondence establishing the CIS and VAT-registration status of both parties, any End User or Intermediary Supplier notifications given or received, and how the VAT return reflected reverse charge transactions. Because the reverse charge depends on facts about the other party to the contract, HMRC may also cross-check your treatment against what the counterparty declared.

A common finding is that a subcontractor charged VAT normally on a supply that should have been reverse charged, meaning the contractor should not have paid that VAT and should not have reclaimed it as input tax in the normal way, creating a mismatch that HMRC's data matching can identify relatively easily across a supply chain.

An invoice for a reverse charge supply must clearly state that the domestic reverse charge applies and specify the amount of VAT the customer must account for, using wording such as confirming the customer must account for the reverse charge output tax on the specified services at the appropriate rate, rather than simply omitting VAT without explanation. An invoice that omits VAT with no reference to the reverse charge is a frequent compliance gap HMRC identifies.

Keeping invoice templates and accounting software correctly configured for reverse charge supplies, rather than relying on manual adjustment for each invoice, reduces the risk of this kind of omission recurring across a run of transactions.

Because reverse charge sales do not generate output VAT to collect from the customer, subcontractors making mainly reverse charge supplies can find themselves in a regular repayment position, since input tax on their costs continues to be recovered as normal. This is a legitimate consequence of the rule, not evidence of an error, but HMRC may still verify these repayment claims as part of the reverse charge check.

The Flat Rate Scheme is generally not compatible with businesses whose supplies are mainly subject to the reverse charge, since the flat rate is designed around collecting output VAT that a reverse charge business no longer collects; HMRC guidance sets out when a business should leave the scheme in these circumstances.

Where VAT was charged normally on a supply that should have been reverse charged, HMRC may need to unwind both the incorrect output tax charged by the supplier and any input tax claimed by the customer on that basis, which can require coordinated correction between both parties rather than a one-sided adjustment. Where the reverse charge was wrongly applied to a supply that should have carried normal VAT, similar correction is needed in the other direction.

A behaviour-based penalty may apply depending on the circumstances, though HMRC has recognised the reverse charge as an area where genuine confusion is common, particularly among smaller subcontractors, and this can be relevant to how a penalty position is assessed. If you disagree with HMRC's conclusion, the decision should set out review and appeal rights within the usual 30-day period.