The VAT domestic reverse charge (DRC) is a rule that shifts the obligation to account for VAT from the supplier of construction services to the customer, and it has applied to most CIS-standard-rated supplies since 1 March 2021.
Under normal VAT rules, the supplier charges VAT on the invoice and pays it to HMRC. Under the DRC, the supplier issues the invoice without charging VAT (marked "reverse charge applies"), and the customer self-accounts for the VAT both as an output and, subject to their normal recovery position, as an input. The cash never changes hands between supplier and customer for the VAT element.
The DRC applies only when all five conditions are met:
- The supply is a specified CIS construction service.
- Both the supplier and the customer are VAT-registered.
- Both the supplier and the customer are CIS-registered.
- The customer is not an end user (they will on-sell or use the services in further construction, not consume them as an occupier or owner).
- The supply is standard-rated or reduced-rated (new-build residential work is zero-rated and falls outside the DRC entirely).
If any one condition is absent, normal VAT rules apply. There is also a 5% de minimis: if the reverse-charge element of an invoice is 5% or less of the total invoice value, normal VAT rules apply to the whole invoice.
The DRC does not change a subcontractor's CIS position. A subcontractor still receives a payment and deduction statement in the normal way; the DRC only affects how VAT is handled on the same transaction.
Our detailed guide, VAT domestic reverse charge in construction, includes worked invoice examples and covers the end-user exception in full.