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Domestic Reverse Charge for Contractors (DRC)

From 1st March 2021 the Domestic Reverse Charge (DRC) came in to effect for Building and Construction services.

This had been set to come in to effect back in 2019 and 2020 but was delayed each time for various reasons.

The basic principle of the Domestic Reverse Charge is to ensure a reduction in VAT fraud by “missing traders”. Missing traders are the names given to companies that exist, purely to charge and receive VAT, but without any intention to pay it over to HMRC.

Who’s affected by the Domestic Reverse Charge

The DRC applies to the Construction Industry Scheme (CIS) and VAT registered Contractors and Sub-Contractors who either buy or sell building and construction services. the DRC does not apply to any customer who is NOT VAT registered in the UK.

  • The supply of services must be those that carry the standard or reduced rate of VAT (20% or 5%) the DRC does not apply to any exempt supplies.
  • The DRC does not apply to End Users and Intermediary supplier businesses. For what is classed as an End User or Intermediary, you can view the website
  • The DRC does not apply to any employment businesses supplying staff or workers or both.

How does the Domestic Reverse Charge work

Under the DRC rules, the Sub-Contractor who is operating under CIS will no longer charge VAT on the sale of their construction services to the Contractor. This means that a Sub-Contractor under CIS will not charge either 20% or 5% VAT on top of their costs.

Instead, the Contractor will retain the VAT the Sub-Contractor would have charged and instead make an adjustment to their own VAT Return to pay the VAT over to HMRC.

What you must do to ensure you follow the rules

Firstly the Contractor MUST review all their Sub-Contractors to determine whether their supply of services falls within the new rules. Once they have established that they do, they must give written confirmation that you are supplying services that fall within the DRC rules and that the Contractor is not an End User or Intermediary.

If you are a Sub-Contractor who also employs other Sub-Contractors, you will also need to follow the same rules as above.

The Sub-Contractor must state on all invoices that fall within the DRC, that the Domestic Reverse Charge has been applied to the invoice, state the VAT rate to which they would have charged, and instruct the Contractor to account for the VAT Themselves. 

Pro’s and Con’s of the Domestic Reverse Charge

The pros are of course the reduction in fraud, but there can also be an upside to Contractors due to the increase in cash flow.

The cons are obviously the reverse for Sub-Contractors however, the silver lining is that most will likely end up reclaiming VAT instead of paying any over to HMRC.

Sub-Contractors who operate a Flat Rate Scheme VAT will need to establish whether it is cost beneficial to remain on the scheme. If the majority of your sales fall within DRC, you will not benefit from remaining within the FRS because you are unable to reclaim the VAT paid on purchases. It is advised in this situation that you deregister from FRS.

What you need to do now

If you are already using bookkeeping software to record your VAT you must ensure that it is capable of adjusting your VAT returns to account for the Domestic Reverse Charge.

If you are unable to operate bookkeeping software or do not wish to, we can help.

We can provide a fully cloud-based bookkeeping package that will accurately calculate the DRC VAT at a very reasonable monthly cost. Please contact us today if you wish to know more.

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