The Construction VAT Reverse Charge, What You Need to Know in 2025

In construction, managing cash flow is already tricky. Add VAT into the mix, and things get even more complex.

Enter the Construction VAT Reverse Charge, a regulation that flipped the way VAT works between contractors and subcontractors.

If you’ve ever wondered why your invoice doesn’t include VAT anymore or why your VAT bill looks different, this blog will explain what’s happening, why it matters, and how to get it right in 2025.

What Is the VAT Reverse Charge?

The Construction VAT Reverse Charge is a rule introduced by HMRC that changes who accounts for VAT on certain construction services.

Normally, a supplier charges VAT on their invoice and pays it to HMRC. With the reverse charge, the customer (contractor) pays the VAT directly to HMRC instead not the supplier.

This only applies to B2B construction services that fall under the CIS (Construction Industry Scheme) and where both parties are VAT-registered.

Who It Affects

• Subcontractors: No longer charge VAT on their invoices for qualifying work, instead, they state that reverse charge applies.

  
  

• Contractors: Must account for the supplier's VAT in their own VAT return, and still reclaim it in the same return, meaning a "nil net" impact.

  
  

It affects services like:

• Groundworks

• Plumbing and electrical installations

• Roofing, tiling, bricklaying

• Demolition and site preparation

  
  

It doesn’t apply to:

• End-users (e.g., homeowners, property developers using the property themselves)

• Employment businesses (labour-only supply)

• Zero-rated works (e.g., new-build housing)

Example: How It Actually Works

Let’s say Joe’s Electrical Ltd is a VAT-registered subcontractor and does £10,000 of work for Build Smart Contractors Ltd, also VAT-registered.

Pre-Reverse Charge:

Joe invoices:

• Labour & materials: £10,000

• VAT (20%): £2,000

• Total invoice: £12,000Joe pays £2,000 to HMRC, Build Smart reclaims it.

  
  

Under Reverse Charge:

Joe invoices:

• Labour & materials: £10,000

• VAT: £0 (Reverse charge applies)

• Invoice total: £10,000BuildSmart self-accounts for the £2,000 VAT — declaring it as both output and input VAT.

Why It’s a Big Deal for Cash Flow and Risk

Subcontractors:

• They no longer receive VAT on top of their invoices, so there’s less cash available day to day.

  
  

• They might have to wait for VAT repayments from HMRC, especially if they’re spending heavily on materials.

  
  

• It’s important to plan ahead so the business doesn’t run into cash shortages.

Contractors:

• They now take on the responsibility of handling more complex VAT paperwork.

  
  

• If they report VAT incorrectly or miss something, HMRC can issue penalties even if it’s an honest mistake.

Common Mistakes to Watch Out For

• Subcontractors accidentally adding VAT when they shouldn’t.

  
  

• Invoices missing the required note: “Reverse Charge, Customer to pay VAT to HMRC.”

  
  

• Not checking or documenting whether the client is an "end user."

  
  

• Accounting software not set up to apply or track reverse charge VAT correctly.

How to Stay Compliant and Avoid Problems

Here are a few easy steps to keep things smooth:

• Check your contracts to see if the reverse charge applies to the work.

  
  

• Update all invoice templates with the proper reverse charge wording.

  
  

• Use cloud-based software like Xero, QuickBooks, or Sage that supports reverse charge accounting.

  
  

• Train your team so that everyone, from admin to site managers, understands how this affects your billing.

How to Lower the Risks

Subcontractors:

• Don’t rely on VAT as a cash float it’s no longer part of your available cash.

  
  

• Apply for monthly VAT returns to get your refunds quicker from HMRC.

  
  

Contractors:

• Always check if your customer is an end user and get their confirmation in writing.

  
  

• Carry out regular checks of your VAT returns to make sure they’re accurate.

  
  

• Maintain a cash buffer to handle any timing delays or reporting corrections.

  
  

How Jfa Helps You

At Jfa, we understand construction accounting inside and out. Here’s how we help:

• Free 1-Hour Finance Health Check — we’ll review your VAT setup and cash flow.

  
  

• Monthly Support — we’ll keep your VAT, systems, and reports in order.

  
  

• Training — we’ll make sure your team understands the rules.

Final Thoughts

The Construction VAT Reverse Charge is here to stay. If you get it wrong, it can hurt your cash and bring penalties. If you get it right, it’ll run smoothly in the background.

We’re here to help you stay compliant, cash-strong, and confident.

Wrapping up today’s insights, tomorrow we simplify another accounting challenge