Domestic Reverse Charge
From 1 March 2021 the Domestic Reverse Charge legislation becomes effective, which will apply to most businesses involved in the supply of building and construction services.

What is the Domestic Reverse Charge?

The Domestic Reverse Charge applies to standard and reduced-rate VAT services:

  • For individuals or businesses who are registered for VAT in the UK
  • Reported within the Construction Industry Scheme (CIS)

The Domestic Reverse Charge has been implemented as an anti-fraud measure, to prevent missing trader fraud – which was projected to cost the government £140m in 2020/21. The new legislation removes the liability to collect and pay VAT from each subcontractor in the supply chain. Instead, the final contractor in the supply chain pays the VAT to HMRC.

The Domestic Reverse Charge (DRC) will apply right through the supply chain up until the point where the customer is no longer a business or is an end-user. It will apply to any construction services covered by the CIS, therefore any invoices which are a mix of labour and materials will also apply under the DRC.

DRC Supply Chain
The first step you need to take is to identify where you sit in the supply chain.

You will need to consider who your suppliers are:

  • Are they VAT Registered?
  • Is the service they are supplying subject to DRC?

You will need to consider who your customers are:

  • Are they end-users?
  • Are they a contractor with an onward supply of services?

If you are the small subcontractor:

You will no longer charge VAT on your invoices to the larger subcontractor. However, you do need to include on your VAT invoice that Domestic Reverse Charge has been applied and detail how much VAT would have been paid ordinarily.

Before 1 March 2021:
Sales invoice to larger subcontractor £100 + £20 VAT
Pays £20 VAT to HMRC

After 1 March 2021:
Sales invoice to larger subcontractor £100 (Show on the sales invoice DRC = £20 VAT)
Pays £0 VAT to HMRC


If you are the larger subcontractor:

You will record the notional reverse charge VAT based on the purchase invoice received by the subcontractor.
No VAT will be charged to the main subcontractor

Before 1 March 2021:
Sales invoice to main subcontractor £110 + £22 VAT
Recovers from subcontractor invoice £20 VAT
Pays HMRC £2

After 1 March 2021:
Sales invoice to main subcontractor £110 (Show on the sales invoice DRC = £22)
DRC is declared on the VAT return for the purchase in box 1 £20
DRC is declared on the VAT return for the purchase in box 4 £20
Box 1 offsets against Box 4 = no VAT to pay


If you are a main subcontractor:
This is the final step of the supply chain and a contractor will now invoice an end-user.
You will record the notional reverse charge VAT based on the purchase invoice received by the larger subcontractor.
When the sales invoice is issued to the customer, you will charge VAT as normal and pay this liability to HMRC.

Before 1 March 2021:
Sales invoice £120 + £24 VAT
Recovers from subcontractor invoice £22 VAT
Pays HMRC £2 VAT

After 1 March 2021:
Sales invoice £120 + £24 VAT
DRC is declared on the VAT return for the purchase in box 1 £22
DRC is declared on the VAT return for the purchase in box 4 £22
Pays HMRC £24 VAT for the sales invoice

Other points to consider:

  • If you are using the VAT Cash Accounting scheme or the Flat Rate scheme, you will not need to apply the DRC rules.
  • If you are using an accounting software to prepare your VAT, the software provider should have implemented changes to record the reverse charge.
  • To find out when you MUST use the reverse charge, please click here.
  • For the full legislation and guidance from HMRC, please click here. HMRC have also produced Flow Charts to assist businesses with the changes.

If you are not sure if the scheme will apply to your business, please contact us and we would be more than happy to help.