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Domestic reverse charge on construction services

After some considerable delay the Domestic Reverse charge (“DRC”) on construction services came into effect on 1 March 2021. It is an anti-avoidance measure designed to reduce fraud in the construction industry and has significant accounting, compliance, and cash-flow costs for building contractors and their customers. Contractual arrangements should take account of the changes.

What is it?

The DRC alters the way in which VAT is paid and accounted for. It does not increase VAT and does not alter the profit of the builder. The normal rule for VAT is that where a builder provides services to its customer it charges the customer VAT. The DRC changes this so instead the customer has to account for the VAT on the supply it receives from the builder on its own VAT return. The reason for introducing this rule is to prevent fraud in the construction industry.

The main points to note are:

  • it only applies to work that is subject to VAT, at either 5% or 20%. It does not apply to zero-rated work.
  • if the supply only consists of materials it does not apply. There must be some labour. However, if it does apply, then the DRC applies to the whole supply. By concession, if the value of the supply relating to the DRC is less than 5%, the builder can invoice normally.
  • the customer must be registered for the Construction Industry Scheme (“CIS”). If not, it does not apply.
  • if the customer is an end user it does not apply. It will only apply if the customer is going to make an onward supply of construction services. The customer must notify the builder whether it is an end user or not.
  • if an intermediary receives construction services and resupplies them to a connected or linked end-user without making material alterations to the supplies, the intermediary is treated as an end user and the DRC does not apply.

Where the DRC does not apply, then normal VAT rules apply.

A major concern for customers is where they do not consider the position properly, the builder charges them VAT and because the DRC should have applied, they cannot recover the VAT as it does not constitute properly chargeable input VAT. They will then have to try and recover it from the builder.

What are the contractual implications?

Given the requirements for the DRC to apply and the potentially serious implications of getting it wrong the contract should establish by means of warranties the relevant points. This would include:

  • that both parties are VAT registered
  • the customer is receiving the supplies for business purposes, and whether it is an end user or intermediary
  • the VAT status of the supplies
  • the payment being outside the scope of the CIS

It should also require the parties to update each other about their status, as this may impact on the continuing application of the DRC charge.

The contract should also deal with the invoicing requirements. Whilst the builder will not be charging VAT, the invoice should state that the supply is a DRC and what the correct rate of VAT should be.


Given the serious implications of getting this wrong, builders and their customers should familiarise themselves with the implications of the DRC. For some customers, particularly intermediaries, there may be some cash-flow benefits to be derived, since rather than having to pay the contractor when they receive the invoice they can simply account and pay for the relevant VAT on their own VAT return and not wait for the Revenue to repay it. The counter side of this is that subcontractors will end up losing working capital since they can retain the VAT they charge for up to three months before accounting for it to the Revenue. The Revenue has indicated that it will apply a light tough in policing the new regime, at least to start with.

For more information, please contact Chris Connors in our Corporate team or join us at our CIS and Reverse Charge VAT webinar on Wednesday 14 April 2021.


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