Domestic Reverse Charge VAT, often called DRC or Reverse Charge VAT, is a VAT rule that applies to certain building and construction services in the UK.
It is mainly relevant where one VAT-registered construction business supplies construction services to another VAT-registered construction business.
This guide explains what Domestic Reverse Charge VAT is, when it applies, and what subcontractors and contractors need to understand before issuing or paying invoices.
What is Domestic Reverse Charge VAT?
Domestic Reverse Charge VAT is a VAT accounting rule.
Normally, a VAT-registered subcontractor charges VAT on their invoice, receives the VAT from the customer, and then pays that VAT to HMRC through their VAT return.
Under Domestic Reverse Charge VAT, the subcontractor does not charge VAT in the normal way.
Instead, the customer accounts for the VAT directly on their own VAT return.
This means the VAT is not physically paid to the subcontractor.
Why does Domestic Reverse Charge VAT exist?
The scheme was introduced to reduce VAT fraud in the construction industry.
It prevents VAT from being collected by a supplier and then not paid to HMRC.
Instead, the customer deals with the VAT through their own VAT return.
When does Domestic Reverse Charge VAT apply?
Domestic Reverse Charge VAT usually applies when all of the following are true:
- The supplier is VAT registered
- The customer is VAT registered
- The supply is for construction services
- The work falls within CIS construction operations
- The supply is standard rated or reduced rated for VAT
- The customer is not the end user
- The customer is making an onward supply of construction services
In simple terms, it often applies where a VAT-registered subcontractor is working for a VAT-registered contractor on a construction project.
When does Domestic Reverse Charge VAT not apply?
Domestic Reverse Charge VAT does not usually apply where:
- The customer is the end user
- The customer is not VAT registered
- The work is zero-rated for VAT
- The supply is outside the scope of CIS
- The supply is to a domestic homeowner
- The supply is only goods or materials with no construction service
- The customer has confirmed they are an end user
An end user is normally the final customer who is receiving the construction work for their own use, rather than selling those construction services on to someone else.
Example: normal VAT invoice
A subcontractor carries out works for £5,000 plus VAT.
Normal VAT invoice:
- Labour and materials: £5,000
- VAT at 20%: £1,000
- Total payable: £6,000
The subcontractor receives £6,000 and later accounts for the £1,000 VAT to HMRC.
Example: Domestic Reverse Charge VAT invoice
A subcontractor carries out works for £5,000 under Domestic Reverse Charge VAT.
Reverse charge invoice:
- Labour and materials: £5,000
- VAT: £0 charged to customer
- Total payable: £5,000
The invoice should state that Domestic Reverse Charge VAT applies and that the customer must account for the VAT to HMRC.
The customer then accounts for the VAT on their own VAT return.
What should a reverse charge invoice say?
A reverse charge invoice should make it clear that the customer must account for the VAT.
Common wording includes:
“Reverse charge: customer to account for VAT to HMRC.”
Or:
“Domestic reverse charge applies. Customer to account for output VAT.”
The invoice should still show the VAT rate or the VAT amount that is subject to reverse charge, but the VAT should not be added to the amount payable.
Does Domestic Reverse Charge VAT apply to materials?
This is where many people get it wrong.
If materials are supplied together with construction services as part of the same supply, Domestic Reverse Charge VAT can apply to the whole supply.
This is different from CIS deductions, where genuine materials are normally excluded from the CIS deduction calculation.
So do not confuse CIS and Domestic Reverse Charge VAT.
They are connected because both often apply to construction services, but they are not the same thing.
CIS vs Domestic Reverse Charge VAT
CIS deals with tax deductions from subcontractor payments.
Domestic Reverse Charge deals with VAT accounting.
They are separate rules.
A subcontractor invoice may need both:
- CIS treatment for labour deductions
- Domestic Reverse Charge VAT treatment for VAT accounting
For example, an invoice may be subject to CIS deduction and also issued under Domestic Reverse Charge VAT if the correct conditions apply.
What contractors should check before paying an invoice
Before paying a subcontractor invoice, contractors should check:
- Is the subcontractor VAT registered?
- Is the customer VAT registered?
- Is the work within CIS construction operations?
- Is the customer an end user?
- Is the work standard rated or reduced rated?
- Has the invoice been issued correctly?
- Has CIS also been considered separately?
If the invoice is wrong, it should be corrected before payment.
What subcontractors should check before issuing an invoice
Before issuing an invoice, subcontractors should check:
- Is the customer VAT registered?
- Is the customer a contractor or an end user?
- Does the work fall under CIS construction operations?
- Should VAT be charged normally?
- Should Domestic Reverse Charge VAT apply?
- Has the invoice wording been included correctly?
If unsure, subcontractors should ask the customer to confirm their VAT and end user status before issuing the invoice.
Why end user confirmation matters
Domestic Reverse Charge VAT does not usually apply where the customer is the end user.
For example, if a business is having work done to its own premises and is not selling those construction services on, it may be the end user.
In that case, the supplier may need to charge VAT in the normal way.
Contractors and subcontractors should get end user confirmation in writing where relevant.
Summary
Domestic Reverse Charge VAT is a VAT rule for certain construction services.
It means the subcontractor does not charge VAT in the normal way. Instead, the customer accounts for VAT on their own VAT return.
It commonly applies between VAT-registered subcontractors and VAT-registered contractors where the work falls within CIS and the customer is not the end user.
Domestic Reverse Charge VAT is separate from CIS. CIS deals with tax deductions. Domestic Reverse Charge deals with VAT accounting.
To avoid invoice disputes and payment delays, VAT status, CIS status and end user status should be checked before works start and before invoices are issued.
For specific tax advice, contractors and subcontractors should speak to their accountant or refer to HMRC guidance.
Check when you must use the VAT domestic reverse charge for building and construction services – https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
