In simple terms…
Under the Domestic Reverse Charge, the subcontractor doesn’t charge VAT on their invoice. Instead, the contractor accounts for the VAT directly with HMRC.
The Domestic Reverse Charge (DRC) is a special VAT accounting rule that applies to many VAT-registered businesses working in the UK construction industry.
Instead of the subcontractor charging and paying VAT to HMRC, the responsibility for accounting for the VAT passes to the contractor receiving the services.
It changes who accounts for the VAT — it doesn’t change how much VAT is due. Instead of the subcontractor charging VAT on their invoice, the contractor accounts for the VAT directly with HMRC through their VAT Return.
The DRC was introduced by HMRC to help reduce VAT fraud within the construction sector.
When does the Domestic Reverse Charge apply?
The DRC generally applies when:
• Both the contractor and subcontractor are VAT registered.
• Both businesses are registered under the Construction Industry Scheme (CIS).
• The work being carried out falls within the scope of CIS.
• The customer is not the end user of the construction services.
If these conditions are met, the subcontractor should not charge VAT on their invoice. Instead, the contractor accounts for the VAT directly through their own VAT Return.
How does it affect contractors?
If you’re a VAT-registered contractor receiving services under the Domestic Reverse Charge, you’ll account for both the input and output VAT on your VAT Return instead of paying VAT to the subcontractor.
How does it affect subcontractors?
If you’re a VAT-registered subcontractor, you’ll issue invoices showing that the Domestic Reverse Charge applies, but you won’t collect the VAT payment from your customer.
This means you may notice a change in your cash flow, as you’re no longer holding VAT before it’s paid to HMRC.
Need help understanding the DRC?
The Domestic Reverse Charge can seem confusing at first, but getting it right is important for staying compliant.
If you’re unsure whether the DRC applies to your business or have questions about construction VAT, our experienced team is always happy to help.
