Answers · UK 2025/26
What is the domestic reverse charge for VAT in the construction industry?
The domestic reverse charge (DRC) shifts VAT accounting responsibility from the supplier to the customer in construction transactions. Instead of the subcontractor charging 20% VAT, the main contractor accounts for VAT on their own VAT return -- removing the risk of VAT fraud in supply chains.
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The domestic reverse charge for construction services (often called the CIS reverse charge) is a VAT rule that applies to most building and construction supplies between VAT-registered businesses in the UK. It was introduced in March 2021 to combat missing trader fraud in construction supply chains. **Who does it apply to?** The DRC applies when ALL of the following conditions are met: - Both supplier and customer are VAT-registered in the UK - The customer is registered under the Construction Industry Scheme (CIS) - The supply is of a construction service that is standard-rated or reduced-rated for VAT - The customer is not the end-user (i.e., they are themselves supplying construction services onward) **What changes under DRC?** *Standard VAT (before DRC):* - Subcontractor invoices £10,000 + £2,000 VAT = £12,000 total - Subcontractor pays £2,000 VAT to HMRC *Under DRC:* - Subcontractor invoices £10,000 (zero VAT charged) - Invoice must state: 'Domestic reverse charge applies -- customer to account for VAT of £2,000 at 20%' - Main contractor accounts for £2,000 VAT on Box 1 of their VAT return AND reclaims £2,000 in Box 4 (assuming full recovery) - Net VAT effect for main contractor: £0 (if fully taxable) **What services are covered?** Services within CIS scope -- groundwork, demolition, construction, installation of heating/plumbing/electrics, interior fitting, painting, and similar. Excluded from DRC: professional services (architects, surveyors), security systems without CIS obligation, manufacturing of materials off-site. **End-user and intermediary supplier status** If the customer is the end-user (e.g., a property developer building for their own occupation, not onward supply), DRC does not apply and normal VAT is charged. Customers must notify suppliers of their end-user status in writing. **Cash flow impact** Subcontractors no longer collect VAT they then pay to HMRC, which can create cash-flow challenges if they were using VAT as working capital. A VAT calculator can help model the impact on your monthly cash position.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.