🏗️ Introduction
If you work in the UK construction industry, you’ve probably heard about Domestic Reverse Charge VAT (DRC). Introduced in March 2021, this rule changes who accounts for VAT on certain B2B construction services. Although it aims to tackle fraud, it also impacts cash flow, invoicing, and compliance—especially for contractors and subcontractors.
In this guide, we’ll walk through when it applies, how to invoice correctly, and how to avoid common mistakes that trigger HMRC penalties.
🔹 1. What is Domestic Reverse Charge VAT?
Under the DRC, the customer (contractor), rather than the supplier (subcontractor), accounts for the VAT. This means you no longer add VAT to your invoice if the work falls under the scheme.
Instead of paying VAT to you, your contractor reports it directly to HMRC through their VAT return.
Key Point: The rule only applies if both supplier and customer are VAT-registered and CIS-registered.
Learn more about CIS rules in our CIS Contractor Registration Guide.
🔹 2. When Does DRC Apply?
The Domestic Reverse Charge applies if:
- The work is subject to CIS
- The supply is standard-rated or reduced-rated (20% or 5% VAT)
- Both supplier and customer are VAT-registered
- The customer reports the work as part of ongoing construction
It does not apply to:
- Zero-rated work (new-build housing)
- Work for non-VAT registered customers (e.g., homeowners)
- Professional-only services like architects or surveyors
🔹 3. How to Invoice Under DRC
When invoicing under the Domestic Reverse Charge:
- Do not add VAT to your invoice total.
- Clearly state: “Reverse Charge: Customer to pay the VAT to HMRC.”
- Show the VAT rate and amount that would have been charged (for the contractor’s VAT return records).
- Keep accurate project and client records.
Example:
vbnetCopyEditLabour: £5,000
Materials: £2,000
VAT: £1,400 (20%) – Reverse Charge – Customer to Account for VAT
Total: £7,000
HMRC’s official guide — Domestic reverse charge technical guidance
🔹 4. Impact on Cash Flow
One major change with DRC is the loss of VAT float. In the past, subcontractors collected VAT and held it until their next return. Now, that extra cash never enters their account.
To manage this:
- Review your payment terms with contractors
- Monitor your cash flow forecast regularly
- Consider shortening invoice cycles
Learn more in our Cash Flow Management for Contractors Guide.
🔹 5. Common Mistakes to Avoid
| Mistake | Why It’s a Problem |
|---|---|
| Applying DRC to zero-rated work | Leads to incorrect invoices and payment disputes |
| Charging VAT instead of the reverse charge | Can trigger HMRC corrections and penalties |
| Failing to state DRC on invoices | Causes confusion and delays in payment |
| Applying DRC to homeowners | Rule doesn’t apply—confuses clients |
🔹 6. Quick Compliance Checklist
- Confirm both parties are VAT and CIS registered
- Apply DRC only to standard/reduced rate construction work
- State “Reverse Charge” clearly on invoices
- Keep supporting documentation for 6+ years
- Train staff on invoicing rules
💬 Final Thoughts
Domestic Reverse Charge VAT might seem like just another HMRC rule, but it changes how money flows in your construction business. By understanding when it applies, invoicing correctly, and adjusting your cash flow planning, you can avoid costly mistakes and keep projects running smoothly.
If you’re unsure how DRC affects your work, book a VAT review with our construction accountants today.