What is the Domestic Reverse Charge in Building and Construction?

Put simply:

• The supplier does not charge VAT on their invoice.
• The customer accounts for both output and input VAT on their own VAT return.

This is only for supplies between VAT-registered businesses in the UK that are reporting under the Construction Industry Scheme (CIS).

When Does it Apply?

The Domestic Reverse Charge applies to specified building and construction services that fall within the CIS scope. Examples include:

• Construction, alteration, repair, extension or demolition of buildings.
• Installation of heating, lighting, power, water or ventilation systems.
• Painting and decorating.

But it only applies where:

• Both supplier and customer are VAT-registered.
• Both are registered for CIS.
• The customer is not an end user or intermediary supplier.

Who is an End User?

An end user is a business or organisation that is the final consumer of the construction service.

For example:

• A property developer hiring a subcontractor to build houses for sale is not an end user — DRC applies.
• A factory owner hiring a contractor to build an extension for their own use is an end user — DRC does not apply.

End users must notify their suppliers in writing if they want to be treated as such.

What Does This Mean for Contractors?

If you’re supplying services under Domestic Reverse Charge:

• You don’t charge VAT on your invoice.
• You must clearly state that the reverse charge applies. Suggested wording is:

“Reverse charge: Customer to account for VAT to HMRC.”

• You must show the VAT rate (e.g. 20%) and amount that would have been charged, but do not add it to the total.
• Your invoice total remains net of VAT.

What Does This Mean for Customers?

If you receive a service under DRC:

• You must account for the supplier’s VAT on your own VAT return.
• You declare both output VAT (as if you were the supplier) and input VAT (as the recipient) – usually cancelling out if you can reclaim it.
• You must check your supplier qualifies for reverse charge treatment.

Exceptions

The Domestic Reverse Charge does not apply if:

• The customer is not VAT-registered.
• The customer is an end user and has notified the supplier.
• The supply is zero-rated (e.g. for new-build housing).
• The supplier is supplying staff only (not construction services).

Why Was it Introduced?

The reverse charge is an anti-fraud measure designed to stop “missing trader” VAT fraud in the construction sector. Under the old system, unscrupulous firms could collect VAT and disappear without paying it to HMRC.

By shifting VAT accounting to the customer, HMRC closes that loophole.

Practical Advice

• Check every job: Is the customer VAT-registered and CIS-registered?
• Confirm end user status: Get written confirmation if they are an end user.
• Update your invoicing: Make sure your invoices show correct reverse charge wording.
• Train your team: Ensure everyone knows when to apply DRC.
• Update your software: Many accounting systems have DRC settings – use them correctly.

Need Help?

The Domestic Reverse Charge can be confusing – especially if you work with both end users and contractors.

If you’re not sure whether you should apply the reverse charge on a particular job, speak to our Tax Accountants for advice. We can:

• Help you check customer status.
• Review your invoicing process.
• Ensure your VAT returns handle reverse charge entries correctly.

Get in touch if you want help reviewing your construction invoicing or VAT processes. We’re here to make sure you stay compliant and avoid costly mistakes.