Domestic Reverse Charge VAT

It applies to all VAT standard rated and reduced rated construction services that fall within the CIS scheme, where your sale is not to an end-user (i.e. not to a property developer or business who will use the building for their own purposes).

It was introduced to combat VAT fraud in the industry, caused by a sub-contractor charging VAT on a sale but going missing or bankrupt before making a payment to HMRC. The new procedure moves the VAT liability down the supply chain, from the sub-contractor to the contractor. It was initially planned to come into force in October 2019 and again in October 2020 but ultimately came into effect 1 March 2021.

How this affects your business depends on whether you are the sub-contractor or the contractor in a project involving construction and building services. It is also worth noting that it only applies to transactions reported under CIS between VAT registered companies in the UK.

Since 1 March 2021, when the new Domestic Reserve Charge for VAT came into place, the subcontractor no longer charges VAT on their sales invoice. Instead, the subcontractor makes a statement on their sales invoice that the customer must declare VAT under the DRC rules and show the VAT liability that is appropriate to the supply (either 20% or 5%). The contractor applies the domestic reverse charge to the invoice by declaring VAT on the sale (in effect declaring sales VAT on behalf of the supplier) and then claiming back VAT on the purchase (providing the contractor is not partially exempt).