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Construction Industry VAT Domestic Reverse Charge

By Ensors Team
1st Mar 2021

I make no apologies for raising this subject matter again (I last wrote about it in November 2019) because its implementation has twice been deferred by HMRC.  The first planned implementation of the VAT Domestic Reverse Charge (DRC) was 1 October 2019, and at the time of writing it is due to be in place from 1 March 2021, so when reading this it will already have begun.  With everything else going on, Covid 19 and Brexit to name but two, it is very possible that DRC may creep into legislation unnoticed and catch out those working in the construction industry.

So, here is a timely reminder of what it is about and what it could mean to you:

Background to DRC

HMRC views the construction industry as a sector that presents a significant risk to the Exchequer, and the DRC is designed to reduce VAT fraud.

What is DRC?

In simple terms the DRC means that building contractors will not pay VAT to their subcontractors on certain supplies and services, but will instead account for it themselves.

At present when a VAT registered subcontractor provides a service to another business within the construction industry they will normally add a VAT charge, typically at the rate of 20%, to the value of their invoice.  The contractor will pay the invoice, including the VAT amount, and in the fullness of time (up to 4 months later) the subcontractor will pay to HMRC the VAT collected as part of the quarterly VAT submission.

From 1 March 2021, the subcontractor will not be required to add the VAT element on the invoice to the contractor, and therefore will no longer collect the VAT.  Instead, the subcontractor will need to modify the invoice to make it clear that the DRC applies, and that the contractor is required to account for the VAT.


A subcontractor will be required to contact customers to get confirmation from them whether the reverse charge will apply, or whether they are the end user or intermediary supplier, in which case VAT should be charged.

The most significant impact of these new rules for subcontractors will be on cashflow.  VAT will no longer be collected from contractor customers which means less funds being available to finance the business until the next VAT Return is due.

In addition, the bookkeeping system will need to be updated to produce invoices containing the correct information, including a statement that makes it clear that DRC applies when appropriate.


A contractor will need to review contracts with subcontractors, to decide if the DRC will apply to the services received, notifying the subcontractor if it will.

Where the contractor receives a correctly prepared invoice from the subcontractor under DRC, and therefore with no VAT applied, they are required to calculate and declare the output VAT as the amount that the subcontractor would have charged if the DRC did not apply.  The same amount of VAT can also be treated and declared as input VAT, in the same period, and as such the DRC effect is neutral.

However, where the subcontractor charges VAT incorrectly the contractor will not be able to recover it as input VAT, instead the contractor will be forced to try to recover the overcharged VAT from the subcontractor which in some cases may prove difficult.

End Customer

A final customer for building work, such as an occupier or a developer, will not have to apply the DRC, and will continue to incur VAT in the same way as currently.

This is a very basic description of the new scheme which will impact on those working within the construction industry and it is vital that those affected understand the rules.