VAT Domestic Reverse Charge (DRC) – What is it?

VAT Domestic Reverse Charge

From 1 March 2021, if services and supplies fall within the DRC, subcontractors will not charge VAT to other building and construction industry businesses. Instead, contractors will account for the VAT due directly to HMRC on the VAT return.

Example: if a subcontractor supplies services for £10,000 (excluding VAT), they would previously have issued an invoice at £10,000 plus VAT at 20% (i.e., £12,000 in total). The contractor would have paid £12,000 (depending on the CIS status of the subcontractor) and reclaimed the VAT on their VAT return.

From 1 March 2021:

  • Subcontractors will not charge VAT on their invoices to contractors.
  • Contractors will pay £10,000 to the subcontractor, not paying the VAT.
  • Contractors will include what previously would have been the sub-contractors, VAT payable to HMRC of £2,000 on their VAT return (box 1) and include the £2,000 VAT reclaim (Box 4).

Services and supplies made to domestic customers or customers who are not VAT registered or not CIS registered, the domestic reverse charge will not apply and VAT will be charged in the usual way.

The reverse charge does not apply to a zero-rated supply of building and construction services (for example new builds).

However, if you only supply standard rated services for new build housing, the reverse charge will apply.

If your customer is an end user (homeowner or landlord, etc), the reverse charge will not apply and you should use the normal VAT rules.


These changes come in for sales invoices dated on or after 1 March 2021, even if the invoice is paid after 1 March 2021.


Subcontractors will need to consider the impact of the loss of VAT being paid to them on sales invoices, as the VAT can provide cashflow for the business. Of course, once the VAT return is completed and paid, the cashflow benefit is cancelled out, but prior to that, the VAT can be used as cashflow.

It is also likely from 1 March 2021 that subcontractors will make VAT repayment claims to HMRC. Subcontractors could consider moving onto monthly returns to speed up the repayment claims, but we would suggest the use of accounting software to ensure the monthly work does not create extra work (and thus higher fees).

Cash accounting cannot use for supplies subject to reverse charge.

Users of the Flat Rate Scheme will have to consider if it is still beneficial, which is unlikely.

Where the services are within the DRC, the invoice must clearly show the VAT rate, and a note stating clearly that the reverse charge applies.


Contractors will need to make sure their subcontractors are charging them the correct VAT. If the DRC applies, but was not, the VAT will be incorrect and cannot be reclaimed. They will need to give the sub-contractors the right information to ensure they include the correct VAT treatment on their invoices.

As the contractor is not physically paying the VAT to subcontractors, they will have a cashflow benefit. But bear in mind their VAT liabilities will be higher.

HMRC Guidance:

Can be found at the link:

Furlough Claims………Be Prepared!
Tax Briefing December 2020


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Wednesday, 26 January 2022

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