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Domestic Reverse Charge (DRC) in the construction industry

  • 22 Mar 2021
  • Author: Malcolm Nichols CTA

The Domestic Reverse Charge (DRC) in the construction industry commenced on 1 March 2021 basically it “shifts” the output tax declaration from the supplier to the customer, but there are a number of conditions and ALL must to be met before it is applicable

  1. The transaction must involve “specified supplies”, see the Construction Industry Scheme (CIS) rules.
  2. Both parties involved in the transaction must be VAT registered.  If the supplier is not registered there is clearly no tax to shift.  If the customer is not VAT  registered, they have no means of accounting for the VAT so normal rules apply to the supplier. 
  3. The supply is standard-rated (20%) or reduced-rated (5%) for VAT purposes, there is a concession for the positive-rated proportion of the overall supply to be disregarded, provided it is no more than 5% of the total.  If the supply is zero-rated there is again no tax to shift, which renders the reverse charge largely irrelevant in the housebuilding sector. 
  4. The transaction falls in whole or part within the CIS, unless the part covered by CIS is no more than 5% of the total value.  If it does not fall within CIS, the reverse charge does not apply.  Many will see this as a governing principle in determining whether to apply the reverse charge or not.  The mention of being partly within and partly outside CIS refers principally to the situation where materials are excluded but labour is covered by CIS.  In such cases, the whole supply is within the reverse charge regime (unless the labour is 5% or less of the total value, in which case the whole supply may be excluded).
  5. The customer is making an onward supply and is not to a person who has confirmed in writing that they are an “end user”.

If the supply is not covered by the CIS, then the customer’s status as an end user (or not) will be irrelevant and there will be no need to consider whether or not written confirmation of end-user status has been made. If the supply is covered by the CIS but customer has not notified the supplier in writing that it is an end user the DRC will apply
The DRC accounting requires the supplier to issue and invoice showing the VAT rate and amount but noted “reverse charge applies’. The customer must account for the output tax by an entry in Box 1 of their VAT return but also show a corresponding entry in Box 4. Therefore the supplier does not charge VAT on their sales invoices unless none of the conditions above apply.  If the supply is a mixture of goods and  services e.g. a builder supplying materials with his labour this is a single supply for VAT purposes and cannot be split so that entire supply falls within the DRC.
HMRC have issued a useful technical guidance paper which also has two clear flow charts one for suppliers the other for buyers; follow this link The guide also has an example of a reverse charge invoice and wording for an end user written notification.
There are some definitions contained in the legislation and these are also covered in the technical guide namely:

  • An ‘end user’- this is defined as: ‘a taxable person who is a recipient of specified services’ (i.e. building work) ‘and uses those services for any purpose other than making further supplies of specified services’, but own occupation, or letting the property, would be examples.
  • An ‘intermediary supplier’, this is defined as – ‘being someone who makes an onward supply of the same building work to an expected end user with whom they are connected, as in a corporate group’.
  • Also an ‘intermediary supplier’, is again ;someone who makes an onward supply of the same building work to an expected end user, where both have an interest in the property’, as with a landlord and tenant.

For users of the Flat Rate Scheme (FRS) any reverse charge supplies are not to be accounted for under the scheme. Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC and recover it simultaneously on the same VAT Return. They will not however be able to reclaim VAT on their other purchases.

For users of the Cash Accounting Scheme (CAS) it cannot used for supplies of services that are subject to the reverse charge and it will bring in the following changes. In its Technical Notes HMRC provide the following advice


For sales, no VAT will be due on payments from customers where the supply is covered by the reverse charge. All you need to do is include the value of the sale in your VAT Return when you receive the payment. If you supply services that are not subject to the reverse charge, for example to private individuals or end users, you must account for VAT on the dates you were paid.

This suggests that as there is no output tax to declare under DRC but supplies not covered then the invoices for these can be declared when payment is received.


If you receive a service subject to the reverse charge from sub-contractors you’ll have to account for the VAT in your VAT Return and recover it simultaneously on the same VAT Return, subject to the normal rules on VAT input tax deduction.
You can account for this on the date you make the payment to your sub-contractor, unless they have issued you with a tax invoice beforehand, in which case you should account for the VAT using the date of the invoice.”

This suggests that invoices received under the DRC are not accounted for on the VAT returns when payment is made but on the basis of the date of the invoice i.e. the tax point.

Finally one of the problems we are seeing is that companies are issuing blanket letters to suppliers/ customers when in reality, it is down to the supplier to apply the rules correctly.

If the supply is not wholly or partly in CIS (subject to the 5% above), then normal VAT rules apply i.e. the supplier is obliged to charge VAT on its invoice and the reverse charge should not be applied by the customer.  

As this is a new procedure it is suggested that the DRC is covered in discussions between supplier and customer at the quotation stage.