The domestic reverse charge (DRC) came into effect on 1 March 2021. Since then VAT registered businesses involved in building or construction services have had to change the way they account for VAT.

Why do we have the domestic reverse charge?

HMRC introduced the DRC as a way to make sure that VAT is reported (and therefore paid) correctly, thereby limiting opportunities for fraud to take place. The DRC works alongside the Construction Industry Scheme (CIS) which governs how subcontractors in the industry should be paid and how they need to issue their invoices.

Prior to March 2021 it was the responsibility of the supplier to charge VAT. However, since March 2021, HMRC have changed the rules and the supplier, e.g. the subcontractor, must now issue a reverse charge invoice and instead the buyer, e.g. the contractor, must now account for the VAT on their VAT return.

  1. The DRC only applies when the transaction is between two CIS VAT registered service suppliers. It does not apply if a CIS VAT registered business is supplying their services to a home or domestic user. In this latter scenario, the VAT registered business will continue to charge and account for the VAT.

What services does the DRC apply to?

The DRC applies to the supply of specified services within the construction industry. Broadly speaking this applies to any services that are reported under the CIS including:

  • Construction
  • Alterations
  • Repairs
  • Extensions
  • Demolitions
  • Roadworks
  • Installations of heating, lighting, air-conditioning, drainage etc
  • Painting and decorating
  • Site clearance, groundworks and landscaping

On their website HMRC have listed which services need to use the DRC and which services don't. See the full list here.

HMRC have also created two useful flowcharts to help suppliers and buyers decide whether they need to use the DRC. See:

It is also worth highlighting that the DRC does not apply to the supplies of:

  • VAT exempt construction services
  • Materials only
  • Workers
  • Services not included by the CIS, unless they are connected to a relevant supply

How to invoice under the DRC

Assuming that the supplier (e.g. subcontractor) and buyer (e.g. contractor) are both caught under the DRC rules the process for invoicing is as follows.

  • The supplier must provide all the usual information that is required on a VAT invoice.
  • The supplier must also include a note on the invoice to highlight that DRC applies and the buyer must account for the VAT on the transaction.
  • The supplier should make sure they do not charge the buyer VAT, but in the invoice details/notes they should state how much VAT is due on the DRC or show the rate of VAT if the VAT amount cannot be shown.
  • The buyer will then pay the supplier the net VAT amount and also pay the VAT amount direct to HMRC.

How will DRC affect suppliers and buyers?

The new DRC rules will see suppliers and buyers adopting a different process for accounting for VAT.

Buyers now have to pay the VAT, which a supplier has reverse charged to them, direct to HMRC.

Suppliers should continue to charge VAT on their invoice, but rather than paying this VAT amount to HMRC, it will instead be paid by the buyer. Suppliers will need to reconcile their accounts accordingly.

Accounting and bookkeeping software

To avoid incorrectly accounting for VAT, it is advised that VAT registered businesses who are mandated to comply with the DRC use bookkeeping or accounting software which has been updated for these changes. Relevant businesses should also make routine checks to ensure all supplies and purchases are properly accounted for.

More information and guidance

At DWilkinson&Company we have extensive knowledge of how the DRC works and what steps VAT registered building and construction businesses need to implement in order to comply with the rules. We can also advise you on the best software to use.

If you'd like further information or guidance on your current processes, don't hesitate to get in touch.