What is the Domestic Reverse Charge?
The Domestic Reverse Charge (DRC) is a VAT accounting mechanism that shifts the responsibility for reporting and paying VAT from the supplier (subcontractor) to the customer (contractor or developer). Instead of the subcontractor charging VAT and passing it to the client, the client accounts for the VAT themselves.
The DRC was introduced for construction services on 1 March 2021 to combat VAT fraud in the construction supply chain. HMRC estimated that "missing trader" VAT fraud — where companies collected VAT from customers but never paid it to HMRC — was costing hundreds of millions of pounds each year.
Who Does the Domestic Reverse Charge Apply To?
The DRC applies when ALL of the following conditions are met:
- The supply is of construction services (as defined for CIS purposes)
- Both parties are VAT registered
- The recipient is not the end user — they will use the services as part of their own supply (i.e., they will charge another party for the work)
- The supply is subject to CIS (or would be, if the parties were not both exempt)
Exceptions — When DRC Does NOT Apply
The DRC does not apply when:
- The customer is the end user (e.g., a homeowner, or a business that occupies the building themselves and is not making an onward supply of construction services)
- The customer is an employment business supplying staff (not services) — normal VAT rules apply
- Either party is not VAT registered
- The services are outside the scope of CIS (e.g., professional services like architecture)
The End User Exception in Practice
This is the most commonly misunderstood aspect. If a retailer hires a contractor to refurbish their shop and they will use the refurbished shop themselves (not resell or sub-contract the construction services), the retailer is the end user and DRC does not apply. Normal VAT is charged.
If the retailer were a property developer who will sell the refurbished property, DRC likely applies.
How to Handle DRC on Your Invoice: Subcontractor's Perspective
If DRC applies, you do not charge VAT. Your invoice shows:
- The net amount (before VAT)
- The applicable VAT rate (e.g., 20%) but zero in the VAT amount column
- A statement: "Domestic Reverse Charge — Customer to account for VAT to HMRC at the rate shown above"
- The total is the net amount (no VAT added)
Example DRC invoice:
| Description | Net | VAT | Total |
|---|---|---|---|
| Electrical installation labour | £5,000 | £0 | £5,000 |
| Domestic Reverse Charge — customer to account for VAT at 20% |
The contractor who receives this invoice accounts for £1,000 VAT in their own VAT return (output tax) and simultaneously reclaims it as input tax if they are making a taxable supply themselves.
How DRC Affects Your VAT Return: Subcontractor
When DRC applies to your supplies, you do not charge or collect VAT. Your VAT return will show:
- Box 6 (net sales): includes the net value of DRC supplies
- No VAT in Box 1 (output tax) for these supplies
This means you may frequently be in a VAT repayment position — if you have input VAT on materials and overheads but no output VAT from DRC supplies, HMRC will owe you money. You can apply for monthly VAT returns to improve your cash flow.
How DRC Affects Your VAT Return: Contractor (Recipient)
When you receive a DRC invoice from a subcontractor:
- Box 1 (output tax): add the VAT you are accounting for (the 20% not charged by the subcontractor)
- Box 4 (input tax): reclaim the same amount as input tax (assuming you use the services for taxable supplies)
- Net VAT effect: usually zero, but it counts toward your total turnover figures
Notifying Your Subcontractors About DRC Status
End users and intermediary suppliers who are not themselves subject to DRC should notify their subcontractors in writing. A simple statement confirming end user status is sufficient:
"[Company Name] confirms that it is the end user of the construction services supplied. The Domestic Reverse Charge does not apply to supplies made to us."
This allows the subcontractor to invoice with normal VAT.
Common DRC Mistakes
Charging VAT When DRC Applies
The most common mistake. Subcontractors charge 20% VAT out of habit. The contractor must then account for VAT they were never supposed to pay to the subcontractor. This creates errors in both parties' VAT returns.
Not Charging VAT When DRC Doesn't Apply
Conversely, subcontractors sometimes assume DRC always applies in construction and zero out VAT for end users. This means the subcontractor fails to account for output VAT they should have charged.
Confusion Over Mixed Supplies
If a single job includes both DRC supplies and non-DRC supplies (e.g., design services alongside installation), split the invoice clearly. DRC applies only to the construction elements.
DRC and CIS: How They Interact
DRC and CIS are separate systems that often apply to the same transactions. When both apply:
- The subcontractor does not charge VAT (DRC)
- The contractor deducts 20% CIS from the labour element
- The net payable is: labour + materials − CIS deduction (no VAT added)
Your invoice must clearly show both: the DRC notification and the CIS deduction.
FlashBill and DRC
FlashBill supports the Domestic Reverse Charge. When DRC is enabled for a client, invoices automatically include the required DRC statement, show £0 VAT, and correctly calculate the CIS deduction on the labour amount only.