VAT for Construction Businesses: Rates, Reverse Charge & CIS

VAT for Construction Businesses: A Plain-English Guide

VAT trips up more construction businesses than almost any other tax. Building work can carry three different VAT rates, the reverse charge turns normal invoicing on its head, and the Construction Industry Scheme sits alongside it all causing plenty of confusion. Whether you run a building firm in Godalming or work as a subcontractor anywhere across Surrey and Hampshire, this guide walks you through the essentials in plain English.

When does a construction business need to register for VAT?

You must register for VAT once your taxable turnover goes over £90,000 in any rolling 12-month period. The key word is “rolling”, the test applies at the end of every month, looking back over the previous 12, rather than lining up with the tax year or your accounting year. You also need to register if you expect your turnover to pass £90,000 within the next 30 days alone, which can happen quickly when a large contract lands.

Once you cross the threshold, you have 30 days to notify HMRC. Register late and HMRC can charge you the VAT you should have collected in the meantime, plus penalties: a painful bill when the money has already been spent.

Registering voluntarily before you reach the threshold is worth considering too. Construction businesses spend heavily on materials, tools, plant and vehicles, all of which usually carry VAT. If most of your customers are VAT-registered contractors who can recover the VAT you charge, voluntary registration lets you reclaim VAT on those costs without making your prices any less competitive.

Which VAT rate applies to building work?

This is where construction differs from most industries. Depending on the project, building work can be standard-rated, reduced-rated or zero-rated:

• 20% (standard rate) — the default for most construction work, including repairs, maintenance, extensions and commercial projects.
• 5% (reduced rate) — certain residential work, including renovating a home that has been empty for two years or more, and conversions that change the number of dwellings in a building, such as turning a house into flats.
• 0% (zero rate) — constructing a brand-new dwelling, along with certain buildings used for charitable purposes. Both the labour and the building materials supplied as part of a qualifying new build can be zero-rated.
  

Applying the right rate matters in both directions. Charge 20% where the zero rate applies and your customer is overpaying, and may struggle to get it back. Charge 5% where 20% was due and HMRC will look to you for the shortfall. The rules around qualifying conversions and empty properties are detailed, so it pays to confirm the position before pricing a job, particularly on residential renovation work.

The domestic reverse charge: who accounts for the VAT?

Since 1 March 2021, many transactions between businesses in the construction supply chain have been covered by the VAT domestic reverse charge. It was introduced to tackle fraud, and it changes who hands the VAT to HMRC.

The reverse charge applies when all of the following are true:

• the supply is a construction service of the kind reported under the Construction Industry Scheme;
• both the supplier and the customer are VAT-registered; and
• the customer is buying the service to sell on as part of their own construction supply. In other words, they are a contractor in the chain rather than the end user of the building work.

Where it applies, the subcontractor invoices without adding VAT. Instead, the invoice must state that the reverse charge applies and show the rate of VAT due. The contractor receiving the invoice then accounts for that VAT on their own return, and, in most cases, recovers it on the same return.

End users: property owners, developers retaining a building, and domestic customers sit outside the reverse charge, so invoices to them carry VAT in the normal way. Unregistered customers are outside it too.

Watch your cash flow as a subcontractor

Before the reverse charge, subcontractors collected VAT from contractors and held onto it until their return was due which was a useful cash flow cushion. That cushion has gone. Many subcontractors now reclaim more VAT than they charge and become “repayment traders”. If that’s you, switching to monthly VAT returns can get those repayments back into the business faster.

CIS and VAT: two separate systems

A common misconception (repeated on plenty of business websites) is that registering for the Construction Industry Scheme affects how much VAT you can reclaim. It doesn’t. CIS and VAT are entirely separate regimes that happen to apply to the same industry.

Under CIS, contractors deduct money from payments to subcontractors (usually 20%, or 30% for unregistered subcontractors) and pass it to HMRC as an advance payment towards the subcontractor’s Income Tax and National Insurance. VAT recovery, by contrast, depends purely on your VAT registration and the nature of your purchases.

The two systems do touch in places. The reverse charge applies to services of the kind reported under CIS, and CIS deductions are calculated on amounts excluding VAT. But registering for one does nothing for your position under the other. If you’d like a refresher on how the scheme itself works, our CIS accountants page covers contractor and subcontractor obligations in detail.

Is the Flat Rate Scheme still worth it?

The Flat Rate Scheme lets smaller businesses pay HMRC a fixed percentage of turnover instead of working out VAT on every transaction. It once suited plenty of tradespeople, but the reverse charge has changed the maths.

Reverse charge sales are left out of your flat rate turnover, and businesses on the scheme generally can’t reclaim VAT on purchases. A subcontractor whose work is mostly caught by the reverse charge can end up paying for a simplification that delivers little benefit while giving up VAT recovery on materials and overheads. If you joined the scheme before March 2021 and work mainly for other contractors, it’s well worth reviewing whether standard VAT accounting now leaves you better off.

For more information read the HMRC’s guidance on the domestic reverse charge.

Digital records and Making Tax Digital

Every VAT-registered business must keep digital records and submit returns through MTD-compatible software: spreadsheets and paper records on their own no longer cut it. Cloud platforms such as Xero handle the construction-specific quirks well, including reverse charge invoicing and CIS deductions; see how we set this up for clients on our Xero accountants page.

Digital reporting is spreading beyond VAT, too. Since April 2026, Making Tax Digital for Income Tax has bought quarterly reporting to many self-employed subcontractors: we’ve covered what that means for CIS subcontractors in a separate guide 

Get your VAT right from the start

Between registration timing, rate decisions, reverse charge invoicing and the interaction with CIS, construction VAT rewards getting things set up properly rather than untangling problems later. JML Accountancy works with builders, contractors and subcontractors across Godalming, Guildford, Farnham, Farnborough and Petersfield. We handle VAT registration, scheme reviews, quarterly returns and the bookkeeping behind them.

If a VAT question is hanging over your next project, call us on 01483 418863 or get in touch through our contact page: we’ll give you a straight answer in plain English.