What is the VAT domestic reverse charge for construction services in the UK?

Full answer

The VAT domestic reverse charge for construction services took effect on 1 March 2021 (delayed from earlier dates due to COVID-19). It applies to supplies of construction services that are within the scope of CIS and where both parties are VAT-registered. How it works: without DRC, a subcontractor would invoice a contractor for, say, £10,000 plus £2,000 VAT; the contractor pays £12,000 total and reclaims the £2,000 VAT. Under DRC, the subcontractor invoices £10,000 with a note "Reverse charge: customer to account for VAT to HMRC." The contractor self-accounts for the £2,000 VAT on their own VAT return (output tax) and simultaneously reclaims it (input tax) -- a net-nil effect. The subcontractor receives only £10,000 cash. Scope: the DRC applies to standard-rated and reduced-rated CIS services. It does not apply to: end users (private individuals, property developers who are the final user of the building), intermediary suppliers (e.g., a main contractor who is also an end user), or services supplied by employment businesses (which are subject to standard VAT rules). Mixed supplies: if a supply is partly DRC and partly non-DRC, the contractor must split the invoice appropriately. Cash flow impact: subcontractors lose the use of VAT float between invoice date and VAT return payment date -- this can significantly impact working capital. VAT Flat Rate Scheme: subcontractors using FRS cannot use FRS for DRC supplies and must leave FRS if DRC becomes their main business activity. HMRC guidance is in VAT Notice 735.

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