VAT Domestic Reverse Charge Margin Guard
HMRC introduced the reverse charge in March 2021 to stop missing trader fraud in construction. Instead of paying 20% VAT to your subcontractor, you now account for it in your VAT return. That means subcontractors lose the VAT float they once used for payroll and materials. This guide shows how to stay compliant and solvent with Toolfy handling the invoice logic and cash tracking.
Mar 2021
Reverse charge start
HMRC Brief 13/20
20% cash hit
If you banked VAT before
HMRC impact assessment
£100m
Fraud targeted annually
HM Treasury estimate
⚠️ Not Tax or Accounting Advice
This guide is for informational purposes only and does not constitute tax advice, accounting advice, or professional financial services. Tax laws, allowances, and HMRC requirements change frequently.
Before making any tax decisions or filing returns: Consult a qualified accountant or tax advisor who can review your specific circumstances. What's mentioned here may not apply to your situation, and regulations may have changed since publication.
Official source: HMRC (gov.uk/hmrc)
When the reverse charge applies
Check the scope quickly using these checkpoints.
1. Parties
- Both supplier + customer VAT-registered in UK
- Customer is CIS-registered
- Supplier not supplying to an end user (written confirmation needed)
2. Work type
- Standard/reduced-rated building or construction services
- Includes materials supplied with labour
- Excludes professional services (architects, surveyors)
3. Invoicing
- Show VAT amount but state “reverse charge applies”
- Do not collect VAT cash; customer accounts for it
- Supplier still records value in VAT return (Box 6)
Scenario table
| Scenario | Treatment | Notes |
|---|---|---|
| Subcontractor → main contractor | Reverse charge applies | No VAT collected, customer accounts for output/input VAT. |
| Main contractor → homeowner | Normal VAT rules | Charge VAT as usual; reverse charge does not apply to end users. |
| Zero-rated work (new builds) | No VAT to charge or reverse-charge | But still record supply correctly in invoices. |
Cash-flow guardrails
- Increase deposit requirements or introduce staged payments so materials are funded without VAT float.
- Use Toolfy dashboards to monitor labour/material costs vs cash collection per project.
- Set up invoice finance or short-term overdrafts for long-running main-contractor contracts.
Interactive reverse-charge checklist
Make reverse-charge compliance automatic
Toolfy’s invoicing + automation keep VAT wording, approvals, and reminders tight—so you focus on jobs, not HMRC headaches.
Related Articles
Markup vs Margin Pricing Guide (2026)
Reset your rates after the reverse charge.
How to Handle Partial Payments Without Getting Burned
Escrow tactics and payment plans that keep cash coming in.
Customer Wants Lower Invoice Amount (Tax Fraud)
Scripts to push back on shady requests.
⚠️ Important Disclaimer
This guide is for general informational and educational purposes only. It does not constitute professional advice of any kind (legal, financial, tax, insurance, or otherwise).
Before making business decisions: Consult with qualified professionals (solicitors, accountants, insurance brokers, etc.) who can assess your specific circumstances. Laws, regulations, and industry standards change frequently and vary by location and situation.
Toolfy and the article authors accept no liability for decisions made or actions taken based on information provided in this guide. You are solely responsible for ensuring compliance with all applicable laws and regulations.